Deregulatory takings and breach of the regulatory contract

New York University Law Review

Volumn 71, Issue 4, 1996, Pages 851-999

  Sidak, J Gregory ^a   Spulber, Daniel F ^b,c,d  

^a STANFORD UNIVERSITY   (United States)

^b NORTHWESTERN UNIVERSITY   (United States)

^c UNIVERSITY OF MICHIGAN   (United States)

^d NORTHWESTERN UNIVERSITY   (United States)

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[No Author keywords available]

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EID: 0030520277     PISSN: 00287881     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (500)

1. U.S. Const. amend. V.
2. See Yee v. City of Escondido, 503 U.S. 519, 522 (1992); William A. Fischel, Regulatory Takings: Law, Economics, and Politics (1995).
3. See Yee v. City of Escondido, 503 U.S. 519, 522 (1992); William A. Fischel, Regulatory Takings: Law, Economics, and Politics (1995).
4. 260 U.S. 393 (1922).
5. Id. at 414.
6. 505 U.S. 1003 (1992).
7. Justice Strong wrote in Transportation Co. v. Chicago, 99 U.S. 635 (1879), that prior decisions "were made in view of Magna Charta and the restriction to be found in the constitution of every State, that private property shall not be taken for public use without just compensation being made." Id. at 642; see also William B. Stoebuck, A General Theory of Eminent Domain, 47 Wash. L. Rev. 553, 563 (1972).
8. On the philosophical foundations of the Takings Clause, see Richard A. Epstein, Takings: Private Property and the Power of Eminent Domain 3-31 (1985).
9. Other English-speaking nations have constitutional or common law protections against uncompensated confiscation of property, although those protections do not correspond precisely to the Takings Clause in the U.S. Constitution. E.g., Austl. Const. § 51(xxxi) (granting Parliament power to make laws concerning "[t]he acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws"); Mutual Pools & Staff Pty. Ltd. v. Commonwealth, F.C., 179 C.L.R. 155 (Austl. 1994); British Columbia Elec. Ry. v. Public Utils. Comm'n of B.C., 25 D.L.R.2d 689, 696 (Can. 1960) (determining "fair and reasonable rate of return"); Consett Iron Co. v. Clavering Trustees, [1935] 2 K.B. 42, 51-56 (U.K.).
10. 438 U.S. 104 (1978).
11. See, e.g., Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 426 (1982) (quoting Penn Central, 438 U.S. at 124).
12. Fischel, supra note 2, at 2.
13. See generally Paul W. MacAvoy, Daniel F. Spulber & Bruce E. Stangle, Is Competitive Entry Free? Bypass and Partial Deregulation in Natural Gas Markets, 6 Yale J. on Reg. 209 (1989).
14. Another name given that arrangement is the regulatory compact. Throughout this Article, we treat the regulatory contract and the regulatory compact as synonymous.
15. The term incumbent burdens was introduced in MacAvoy, Spulber & Stangle, supra note 11, at 210, 224-31, in their analysis of partial deregulation of natural gas transmission. Justice Breyer has made the analogous argument with respect to the asymmetric regulation of AT&T following the breakup of the Bell System. See Stephen G. Breyer, Antitrust, Deregulation, and the Newly Liberated Marketplace, 75 Cal. L. Rev. 1005, 1022-24 (1987). See generally Paul W. MacAvoy, The Failure of Antitrust and Regulation to Establish Competition in Long-Distance Telephone Services (1996).
16. The term incumbent burdens was introduced in MacAvoy, Spulber & Stangle, supra note 11, at 210, 224-31, in their analysis of partial deregulation of natural gas transmission. Justice Breyer has made the analogous argument with respect to the asymmetric regulation of AT&T following the breakup of the Bell System. See Stephen G. Breyer, Antitrust, Deregulation, and the Newly Liberated Marketplace, 75 Cal. L. Rev. 1005, 1022-24 (1987). See generally Paul W. MacAvoy, The Failure of Antitrust and Regulation to Establish Competition in Long-Distance Telephone Services (1996).
17. U.S. Const. amend. XIV, § 1; Nollan v. California Coastal Comm'n, 483 U.S. 825, 827 (1987); Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 122 (1978); Chicago, B. & Q.R.R. Co. v. Chicago, 166 U.S. 226, 238-39 (1897). In addition, 26 states have constitutional provisions that are stronger than the Takings Clause in that they expressly require compensation for private property "damaged" by state action (as opposed to being confiscated). See Fischel, supra note 2, at 87; William B. Stoebuck, The Property Right of Access Veisus the Power of Eminent Domain, 47 Tex. L. Rev. 733, 733-34 (1969).
18. Pub. L. No. 102-486, 106 Stat. 2776 (1992).
19. 16 U.S.C. §§ 791-828C (1994).
20. Id. § 824j(a); see also Inquiry Concerning the Commission's Pricing Policy for Transmission Services Provided Public Utilities Under the Federal Power Act; Policy Statement, 59 Fed. Reg. 55,031 (1994); William J. Baumol & J. Gregory Sidak, Transmission Pricing and Stranded Costs in the Electric Power Industry 12-16 (1995).
21. Id. § 824j(a); see also Inquiry Concerning the Commission's Pricing Policy for Transmission Services Provided Public Utilities Under the Federal Power Act; Policy Statement, 59 Fed. Reg. 55,031 (1994); William J. Baumol & J. Gregory Sidak, Transmission Pricing and Stranded Costs in the Electric Power Industry 12-16 (1995).
22. Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming Regulation, 166 Pub. Util. Rep. 4th (PUR) 1, 33 (Cal. Pub. Utils. Comm'n 1995) [hereinafter Restructuring California's Electric Services Industry]; Benjamin A. Holden, California Regulators Approve Plan to Deregulate Market for Power by '98, Wall St. J., Dec. 21, 1995, at A2.
23. Pub. L. No. 104-104, 110 Stat. 56 (1996).
24. See, e.g., Ingo Vogelsang & Bridger M. Mitchell, Telecommunications Competition: The Last Ten Miles (forthcoming 1996).
25. See, e.g., MCI Telecommunications Corp. v. Pacific Bell, Nos. 94-12-032, 95-01-009, 1995 Cal. PUC LEXIS 458, at *32-*34 (Cal. Pub. Utils. Comm'n May 10, 1995); In re Investigation into IntraLATA Presubscription, No. 930330-TP, 1995 Fla. PUC LEXIS 1046, at *1 (Fla. Pub. Serv. Comm'n July 31, 1995); Re IntraLATA Presubscription, 160 Pub. Util. Rep. 4th (PUR) 41 (Fla. Pub. Serv. Comm'n 1995); In re MCI Telecommunications Corp., 160 Pub. Util. Rep. 4th (PUR) 19 (Mich. Pub. Serv. Comm'n 1995); Re City Signal, Inc., 159 Pub. Util. Rep. 4th (PUR) 532 (Mich. Pub. Serv. Comm'n 1995); In re A Complaint and Petition for an Order Requiring IntraLATA Equal Access in the Exchs. of Ameritech Wis., No. 6720-TI-111, 1995 Wisc. PUC LEXIS 24, at *1-*6 (Pub. Serv. Comm'n of Wis. July 25, 1995).
26. See, e.g., In re Alternative Regulatory Frameworks for Local Exch. Carriers, Decision No. 95-08-022, 1995 Cal. PUC LEXIS 628 (Cal. Pub. Utils. Comm'n Aug. 11, 1995); Re Competition for Local Exch. Serv., 163 Pub. Util. Rep. 4th (PUR) 155 (Cal. Pub. Utils. Comm'n 1995); In re Commission's Own Motion to Establish Permanent Interconnection Arrangements Between Basic Local Exch. Serv. Providers, No. U-10860, 1995 Mich. PSC 226, at *11-*12 (Mich. Pub. Serv. Comm'n Sept. 21, 1995); Re City Signal, Inc., 164 Pub. Util. Rep. 4th (PUR) 166 (Mich. Pub. Serv. Comm'n 1995); Alexander Arena of the Telecommunications Authority of Hong Kong, Statement No. 6 Regarding Interconnection Configurations and Basic Underlying Principles, Interconnection and Related Competition Issues (June 3, 1995); Alexander Arena of the Telecommunications Authority of Hong Kong, Statement No. 7 Regarding Carrier-to-Carrier Charging Principles, Interconnection and Related Competition Issues (June 10, 1995); Alexander Arena, Telecommunications Authority of Hong Kong, Statement No. 8 Regarding Points of Interconnection, Interconnection and Related Competition Issues (June 10, 1995). See generally Alexander C. Larson, Reforming Telecommunications Policy in Response to Entry into Local Exchange Markets, 18 Hastings Comm. & Ent. L.J. 1 (1995); Alexander C. Larson, William E. Kovacic & Douglas R. Mudd, Competitive Access Issues and Telecommunications Regulatory Policy, 20 J. Contemp. L. 419 (1994).
27. See, e.g., In re Alternative Regulatory Frameworks for Local Exch. Carriers, Decision No. 95-08-022, 1995 Cal. PUC LEXIS 628 (Cal. Pub. Utils. Comm'n Aug. 11, 1995); Re Competition for Local Exch. Serv., 163 Pub. Util. Rep. 4th (PUR) 155 (Cal. Pub. Utils. Comm'n 1995); In re Commission's Own Motion to Establish Permanent Interconnection Arrangements Between Basic Local Exch. Serv. Providers, No. U-10860, 1995 Mich. PSC 226, at *11-*12 (Mich. Pub. Serv. Comm'n Sept. 21, 1995); Re City Signal, Inc., 164 Pub. Util. Rep. 4th (PUR) 166 (Mich. Pub. Serv. Comm'n 1995); Alexander Arena of the Telecommunications Authority of Hong Kong, Statement No. 6 Regarding Interconnection Configurations and Basic Underlying Principles, Interconnection and Related Competition Issues (June 3, 1995); Alexander Arena of the Telecommunications Authority of Hong Kong, Statement No. 7 Regarding Carrier-to-Carrier Charging Principles, Interconnection and Related Competition Issues (June 10, 1995); Alexander Arena, Telecommunications Authority of Hong Kong, Statement No. 8 Regarding Points of Interconnection, Interconnection and Related Competition Issues (June 10, 1995). See generally Alexander C. Larson, Reforming Telecommunications Policy in Response to Entry into Local Exchange Markets, 18 Hastings Comm. & Ent. L.J. 1 (1995); Alexander C. Larson, William E. Kovacic & Douglas R. Mudd, Competitive Access Issues and Telecommunications Regulatory Policy, 20 J. Contemp. L. 419 (1994).
28. See Telecom Corp. of N.Z. Ltd. v. Clear Communications Ltd., [1995] 1 N.Z.L.R. 385 (P.C. 1994); see also William J. Baumol & J. Gregory Sidak, The Pricing of Inputs Sold to Competitors: Rejoinder and Epilogue, 12 Yale J. on Reg. 177 (1995) (discussing New Zealand interconnection litigation).
29. See Thomas E. Weber, AT&T Accuses Ameritech of Charging Unfair Prices to Resell Local Services, Wall St. J., Dec. 26, 1995, at B2 (pricing of resale of basic service elements in Illinois); Thomas E. Weber, Time Warner Seeks Mediation in Talks with Ameritech, Wall St. J., Dec. 27, 1995, at 17 (cable-television company asking Ohio regulators to mediate interconnection pricing).
30. See Thomas E. Weber, AT&T Accuses Ameritech of Charging Unfair Prices to Resell Local Services, Wall St. J., Dec. 26, 1995, at B2 (pricing of resale of basic service elements in Illinois); Thomas E. Weber, Time Warner Seeks Mediation in Talks with Ameritech, Wall St. J., Dec. 27, 1995, at 17 (cable-television company asking Ohio regulators to mediate interconnection pricing).
31. Washington Utils. & Transp. Comm'n v. U S West Communications, Inc., Nos. UT-941464, -941465, -950146, -950265, 1995 Wash. UTC LEXIS 47, at *21-*22, *71-*80 (Wash. Utils. & Transp. Comm'n Oct. 31, 1995); Re Competition for Local Exchange Service, 165 Pub. Util. Rep. 4th (PUR) 127, 134 (Cal. Pub. Utils. Comm'n 1995).
32. Bell Atl. Tel. Cos. v. FCC, 24 F.3d 1441, 1445 (D.C. Cir. 1994) (noting that FCC's order of physical co-location "directly implicates the Just Compensation Clause of the Fifth Amendment, under which a 'permanent physical occupation authorized by government is a taking without regard to the public interests that it may serve'" (quoting Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 426 (1982))).
33. GTE Northwest, Inc. v. Public Util. Comm'n, 900 P.2d 495 (Or. 1995), cert. denied, 116 S. Ct. 1541 (1996).
34. See, e.g., Intermedia Communications of Fla., Inc., No. 921074-TP, 1994 Fla. PUC LEXIS 290, at *8-*9 (Fla. Pub. Serv. Comm'n Mar. 10, 1994).
35. Pub. L. No. 104-104, 110 Stat. 56 (1996).
36. See Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Notice of Proposed Rulemaking, 59 Fed. Reg. 35,274, 35,278 (1994) (reporting estimates from tens of billions of dollars to $200 billion); American Bar Ass'n, Annual Report, Section of Public Utility, Communications and Transportation Law 188 (1994) ($300 billion estimate); NARUC Eyes Stranded Investment Jurisdictional Issues, Energy Rep., Mar. 7, 1994, at 129-30 (reporting $200 billion to $300 billion estimate by an investor-owned utility's vice president of corporate strategic planning). See generally Baumol & Sidak, supra note 17, at 98-114; William J. Baumol & J. Gregory Sidak, Stranded Costs, 18 Harv. J.L. & Pub. Pol'y 835, 836 (1995).
37. See Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Notice of Proposed Rulemaking, 59 Fed. Reg. 35,274, 35,278 (1994) (reporting estimates from tens of billions of dollars to $200 billion); American Bar Ass'n, Annual Report, Section of Public Utility, Communications and Transportation Law 188 (1994) ($300 billion estimate); NARUC Eyes Stranded Investment Jurisdictional Issues, Energy Rep., Mar. 7, 1994, at 129-30 (reporting $200 billion to $300 billion estimate by an investor-owned utility's vice president of corporate strategic planning). See generally Baumol & Sidak, supra note 17, at 98-114; William J. Baumol & J. Gregory Sidak, Stranded Costs, 18 Harv. J.L. & Pub. Pol'y 835, 836 (1995).
38. See Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Notice of Proposed Rulemaking, 59 Fed. Reg. 35,274, 35,278 (1994) (reporting estimates from tens of billions of dollars to $200 billion); American Bar Ass'n, Annual Report, Section of Public Utility, Communications and Transportation Law 188 (1994) ($300 billion estimate); NARUC Eyes Stranded Investment Jurisdictional Issues, Energy Rep., Mar. 7, 1994, at 129-30 (reporting $200 billion to $300 billion estimate by an investor-owned utility's vice president of corporate strategic planning). See generally Baumol & Sidak, supra note 17, at 98-114; William J. Baumol & J. Gregory Sidak, Stranded Costs, 18 Harv. J.L. & Pub. Pol'y 835, 836 (1995).
39. See Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Notice of Proposed Rulemaking, 59 Fed. Reg. 35,274, 35,278 (1994) (reporting estimates from tens of billions of dollars to $200 billion); American Bar Ass'n, Annual Report, Section of Public Utility, Communications and Transportation Law 188 (1994) ($300 billion estimate); NARUC Eyes Stranded Investment Jurisdictional Issues, Energy Rep., Mar. 7, 1994, at 129-30 (reporting $200 billion to $300 billion estimate by an investor-owned utility's vice president of corporate strategic planning). See generally Baumol & Sidak, supra note 17, at 98-114; William J. Baumol & J. Gregory Sidak, Stranded Costs, 18 Harv. J.L. & Pub. Pol'y 835, 836 (1995).
40. See Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Notice of Proposed Rulemaking, 59 Fed. Reg. 35,274, 35,278 (1994) (reporting estimates from tens of billions of dollars to $200 billion); American Bar Ass'n, Annual Report, Section of Public Utility, Communications and Transportation Law 188 (1994) ($300 billion estimate); NARUC Eyes Stranded Investment Jurisdictional Issues, Energy Rep., Mar. 7, 1994, at 129-30 (reporting $200 billion to $300 billion estimate by an investor-owned utility's vice president of corporate strategic planning). See generally Baumol & Sidak, supra note 17, at 98-114; William J. Baumol & J. Gregory Sidak, Stranded Costs, 18 Harv. J.L. & Pub. Pol'y 835, 836 (1995).
41. Restructuring California's Electric Services Industry, supra note 18, at 10.
42. Retail Competition Pilot Program, Order Establishing Final Guidelines and Requesting Compliance Filings, No. DR 95-250, Order No. 22,033, at 13 (N.H. Pub. Utils. Comm'n Feb. 28, 1996) (on file with authors).
43. Administrative Law Judge's Ruling Clarifying the Scope of Phase II Testimony, Order Instituting Rulemaking on the Commission's Own Motion into Competition for Local Exchange Service, R.95-04-043, Order Instituting an Investigation on the Commission's Own Motion into Competition for Local Exchange Service, 1.95-04-044, at 5-7 (Cal. Pub. Utils. Comm'n Oct. 5, 1995) (on file with authors).
44. See, e.g., Agis Salpukas, New York State Utility Seeks Sweeping Changes, N.Y. Times, Oct. 7, 1995, at 35; Fred Vogelstein, Electric Utility Bond Holders Face More Risk, Wall St. J., Nov. 24, 1995, at C1 (reporting that Niagara Mohawk Power, with $4.2 billion in debt outstanding, is considering declaring bankruptcy).
45. See, e.g., Agis Salpukas, New York State Utility Seeks Sweeping Changes, N.Y. Times, Oct. 7, 1995, at 35; Fred Vogelstein, Electric Utility Bond Holders Face More Risk, Wall St. J., Nov. 24, 1995, at C1 (reporting that Niagara Mohawk Power, with $4.2 billion in debt outstanding, is considering declaring bankruptcy).
46. Just as there is a regulatory contract, so also is it conceivable that the state could commit regulatory torts, such as trespass, interference with contractual or prospective economic advantage, and fraud. To keep the scope of this Article manageable, however, we confine our analysis to theories of contract and property.
47. A deregulatory taking is thus an important example of the compensable transformation of economic institutions that William Fischel describes: Just compensation is a means of smoothing out transformations in the economy, whether they be for internal improvements or for institutional change. The Takings Clause serves both as a check to excessive public enthusiasm (since money must be paid) and as a facilitator (since property must be surrendered). But it does not prohibit change. Thus if Hawaii wants to reject some of its anachronistic landholding system, there should be no bar to its doing so if compensation is made. It isn't just roads and post offices that qualify as public goods; economic institutions do, too. Fischel, supra note 2, at 73 (referring to Hawaii Hous. Auth. v. Midkiff, 467 U.S. 229 (1984)).
48. We confine our analysis to the Takings Clause of the U.S. Constitution. Analogous provisions in the state constitutions, some of which predate the Fifth Amendment, may offer even stronger protections against uncompensated confiscations of property. See, e.g., Burrow v. City of Keene, 432 A.2d 15, 18 (N.H. 1981) ("[T]he New Hampshire Constitution makes explicit what is implicit in the Fifth Amendment to the Federal Constitution, namely, that 'no part of a man's property shall be taken from him . . . without his consent . . . .'" (emphasis in original) (quoting N.H. Const. pt. 1, art. 2)).
49. Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 124 (1978).
50. See William J. Baumol & J. Gregory Sidak, Toward Competition in Local Telephony 93-116 (1994) [hereinafter Baumol & Sidak, Toward Competition in Local Telephony]; William J. Baumol & J. Gregory Sidak, The Pricing of Inputs Sold to Competitors, 11 Yale J. on Reg. 171, 178-89 (1994) [hereinafter Baumol & Sidak, The Pricing of Inputs Sold to Competitors].
51. See William J. Baumol & J. Gregory Sidak, Toward Competition in Local Telephony 93-116 (1994) [hereinafter Baumol & Sidak, Toward Competition in Local Telephony]; William J. Baumol & J. Gregory Sidak, The Pricing of Inputs Sold to Competitors, 11 Yale J. on Reg. 171, 178-89 (1994) [hereinafter Baumol & Sidak, The Pricing of Inputs Sold to Competitors].
52. E.g., Telecom Corp. of N.Z. Ltd. v. Clear Communications Ltd., [1995] 1 N.Z.L.R. 385 (P.C. 1994).
53. See William J. Baumol, John C. Panzar & Robert D. Willig, Contestable Markets and the Theory of Industry Structure 8 (rev. ed. 1988); Sanford V. Berg & John Tschirhart, Natural Monopoly Regulation: Principles and Practice 22 (1988); Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization 295-96 (2d ed. 1994); Roger Sherman, The Regulation of Monopoly 80-81 (1989); Daniel F. Spulber, Regulation and Markets 3 (1989); Jean Tirole, The Theory of Industrial Organization 19-20 (1988); Kenneth E. Train, Optimal Regulation: The Economic Theory of Natural Monopoly 6-8 (1991).
54. See William J. Baumol, John C. Panzar & Robert D. Willig, Contestable Markets and the Theory of Industry Structure 8 (rev. ed. 1988); Sanford V. Berg & John Tschirhart, Natural Monopoly Regulation: Principles and Practice 22 (1988); Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization 295-96 (2d ed. 1994); Roger Sherman, The Regulation of Monopoly 80-81 (1989); Daniel F. Spulber, Regulation and Markets 3 (1989); Jean Tirole, The Theory of Industrial Organization 19-20 (1988); Kenneth E. Train, Optimal Regulation: The Economic Theory of Natural Monopoly 6-8 (1991).
55. See William J. Baumol, John C. Panzar & Robert D. Willig, Contestable Markets and the Theory of Industry Structure 8 (rev. ed. 1988); Sanford V. Berg & John Tschirhart, Natural Monopoly Regulation: Principles and Practice 22 (1988); Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization 295-96 (2d ed. 1994); Roger Sherman, The Regulation of Monopoly 80-81 (1989); Daniel F. Spulber, Regulation and Markets 3 (1989); Jean Tirole, The Theory of Industrial Organization 19-20 (1988); Kenneth E. Train, Optimal Regulation: The Economic Theory of Natural Monopoly 6-8 (1991).
56. See William J. Baumol, John C. Panzar & Robert D. Willig, Contestable Markets and the Theory of Industry Structure 8 (rev. ed. 1988); Sanford V. Berg & John Tschirhart, Natural Monopoly Regulation: Principles and Practice 22 (1988); Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization 295-96 (2d ed. 1994); Roger Sherman, The Regulation of Monopoly 80-81 (1989); Daniel F. Spulber, Regulation and Markets 3 (1989); Jean Tirole, The Theory of Industrial Organization 19-20 (1988); Kenneth E. Train, Optimal Regulation: The Economic Theory of Natural Monopoly 6-8 (1991).
57. See William J. Baumol, John C. Panzar & Robert D. Willig, Contestable Markets and the Theory of Industry Structure 8 (rev. ed. 1988); Sanford V. Berg & John Tschirhart, Natural Monopoly Regulation: Principles and Practice 22 (1988); Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization 295-96 (2d ed. 1994); Roger Sherman, The Regulation of Monopoly 80-81 (1989); Daniel F. Spulber, Regulation and Markets 3 (1989); Jean Tirole, The Theory of Industrial Organization 19-20 (1988); Kenneth E. Train, Optimal Regulation: The Economic Theory of Natural Monopoly 6-8 (1991).
58. See William J. Baumol, John C. Panzar & Robert D. Willig, Contestable Markets and the Theory of Industry Structure 8 (rev. ed. 1988); Sanford V. Berg & John Tschirhart, Natural Monopoly Regulation: Principles and Practice 22 (1988); Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization 295-96 (2d ed. 1994); Roger Sherman, The Regulation of Monopoly 80-81 (1989); Daniel F. Spulber, Regulation and Markets 3 (1989); Jean Tirole, The Theory of Industrial Organization 19-20 (1988); Kenneth E. Train, Optimal Regulation: The Economic Theory of Natural Monopoly 6-8 (1991).
59. See William J. Baumol, John C. Panzar & Robert D. Willig, Contestable Markets and the Theory of Industry Structure 8 (rev. ed. 1988); Sanford V. Berg & John Tschirhart, Natural Monopoly Regulation: Principles and Practice 22 (1988); Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization 295-96 (2d ed. 1994); Roger Sherman, The Regulation of Monopoly 80-81 (1989); Daniel F. Spulber, Regulation and Markets 3 (1989); Jean Tirole, The Theory of Industrial Organization 19-20 (1988); Kenneth E. Train, Optimal Regulation: The Economic Theory of Natural Monopoly 6-8 (1991).
60. Spulber, supra note 41, at 138.
61. The firm's average-cost function refers to the cost per unit of output evaluated at each output level. The firm's marginal-cost function refers to the additional cost of producing one more unit of output, evaluated at each level of output. Economies of scale are not necessary for natural monopoly. The natural monopoly property can be present at an output level at which the cost function exhibits decreasing returns to scale. See Spulber, supra note 41, at 115-18; see also Carlton & Perloff, supra note 41, at 58-63.
62. On the relationship of reputation to repeated games, see David M. Kreps, A Course in Microeconomic Theory 531-36, 764-67 (1990). In this Article and in our previous writings, we emphasize that the relationship between the regulated firm and its regulator is a bargaining situation. That is, the relationship is not, as it is sometimes characterized, either a setting in which the regulator imposes exogenous rules on passive firms or a setting in which a passive regulator is "captured" by the firms that it ostensibly regulates.
63. More precisely, stranded investment is a subset of stranded costs. The latter includes expenditures (such as the mandatory purchase of energy at the utility's avoided cost but above the market price of such energy) that are not capital investments in physical plant per se, but which nonetheless reflect outlays required by regulators that cannot be recouped in the presence of competitive entry. Throughout this Article, we shall use the broader concept of stranded costs.
64. See MacAvoy, Spulber & Stangle, supra note 11, at 209-10.
65. See id.
66. Thomas G. Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals' Costs to Achieve Power over Price, 96 Yale L.J. 209, 209 (1986).
67. See generally Michael K. Kellogg, John Thorne & Peter W. Huber, Federal Telecommunications Law 211-20, 402-05 (1992).
68. Affidavit of Glenn A. Woroch at 8-12, United States v. Western Elec. Co., No. 82-0192 (D.D.C. filed July 6, 1994) (Affidavit dated June 27, 1994, submitted on behalf of Motion of Bell Atlantic Corporation, BellSouth Corporation, Nynex Corporation, and Southwestern Bell Corporation to Vacate the Decree); MFS Communications Co., Inc., 1995 SEC Form 10-K, at 8-9 (1995).
69. See generally Kellogg, Thorne & Huber, supra note 49, at 291-342; MacAvoy, supra note 13, at 175-200.
70. See generally Kellogg, Thorne & Huber, supra note 49, at 291-342; MacAvoy, supra note 13, at 175-200.
71. The principal rationale for the quarantine is the fear (under cost-of-service regulation) of cost misallocation by an RBOC from regulated to unregulated products and a related fear that such misallocation would enable the RBOC to engage in predation against rivals in the unregulated market. For critiques of the plausibility of that theory, or of the need to resort to a quarantine to prevent the perceived competitive risk, see MacAvoy, supra note 13, ch. 6; Paul S. Brandon & Richard L. Schmalensee, The Benefits of Releasing the Bell Companies from the Interexchange Restrictions, 16 Managerial & Decision Econ. 349-64 (1995); J. Gregory Sidak, Telecommunications in Jericho, 81 Cal. L. Rev. 1209, 1216-22 (1993) (book review); Daniel F. Spulber, Deregulating Telecommunications, 12 Yale J. on Reg. 25 (1995).
72. The principal rationale for the quarantine is the fear (under cost-of-service regulation) of cost misallocation by an RBOC from regulated to unregulated products and a related fear that such misallocation would enable the RBOC to engage in predation against rivals in the unregulated market. For critiques of the plausibility of that theory, or of the need to resort to a quarantine to prevent the perceived competitive risk, see MacAvoy, supra note 13, ch. 6; Paul S. Brandon & Richard L. Schmalensee, The Benefits of Releasing the Bell Companies from the Interexchange Restrictions, 16 Managerial & Decision Econ. 349-64 (1995); J. Gregory Sidak, Telecommunications in Jericho, 81 Cal. L. Rev. 1209, 1216-22 (1993) (book review); Daniel F. Spulber, Deregulating Telecommunications, 12 Yale J. on Reg. 25 (1995).
73. The principal rationale for the quarantine is the fear (under cost-of-service regulation) of cost misallocation by an RBOC from regulated to unregulated products and a related fear that such misallocation would enable the RBOC to engage in predation against rivals in the unregulated market. For critiques of the plausibility of that theory, or of the need to resort to a quarantine to prevent the perceived competitive risk, see MacAvoy, supra note 13, ch. 6; Paul S. Brandon & Richard L. Schmalensee, The Benefits of Releasing the Bell Companies from the Interexchange Restrictions, 16 Managerial & Decision Econ. 349-64 (1995); J. Gregory Sidak, Telecommunications in Jericho, 81 Cal. L. Rev. 1209, 1216-22 (1993) (book review); Daniel F. Spulber, Deregulating Telecommunications, 12 Yale J. on Reg. 25 (1995).
74. Market power is "the power to control prices or exclude competition." United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956). It is "the ability to raise prices above those that would be charged in a competitive market." NCAA v. Board of Regents of the Univ. of Okla., 468 U.S. 85, 109 n.38 (1984); accord Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 27 n.46 (1984); William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 Harv. L. Rev. 937, 937 (1981). The Supreme Court has imposed the market-power screen in a variety of contexts. See, e.g., Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224-26 (1993); FTC v. Indiana Fed'n of Dentists, 476 U.S. 447, 460 (1986) ("[T]he purpose of the inquiries into market definition and market power is to determine whether an arrangement has the potential for genuine adverse effects on competition . . . ."); Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 296 (1985).
75. See, e.g., NCAA, 468 U.S. at 98-102; Broadcast Music, Inc. v. Columbia Broadcasting Sys., Inc., 441 U.S. 1, 18-23 (1979).
76. The following discussion draws from Robert W. Crandall & J. Gregory Sidak, Competition and Regulatory Policies for Interactive Broadband Networks, 68 S. Cal. L. Rev. 1203 (1995).
77. See, e.g., Lester D. Taylor, Telecommunications Demand in Theory and Practice 9 (1994).
78. See Spulber, supra note 52, at 31-45.
79. See, e.g., Bruce M. Owen & Steven S. Wildman, Video Economics 14-18 (1992).
80. See, e.g., Robert W. Crandall, After the Breakup: U.S. Telecommunications in a More Competitive Era 23-29 (1991).
81. Pub. L. No. 95-617, 92 Stat. 3117 (1978).
82. Under PURPA, a qualifying facility must produce useful thermal energy through the sequential use of the energy used to generate electricity. 16 U.S.C. §§ 796(17)-(18) (1994); 18 C.F.R. § 292 (1995). A qualifying facility must meet certain ownership, operating, and efficiency criteria established by the Federal Energy Regulatory Commission. 18 C.F.R. § 292.205-206 (1996). Among the advantages of being designated a qualifying facility are that electric utilities must provide the qualifying facility interconnection, must purchase its output at the purchasing utility's avoided cost, and must provide the qualifying facility back-up power. Id. §§ 292.303(c)-(d), 292.305(b).
83. Public Utility Regulatory Policies Act of 1978, Pub. L. No. 95-617, §§ 202-04, 92 Stat. 3117, 3135-40 (codified as amended at 16 U.S.C. § 24 (1994)). PURPA added §§ 210, 211, and 212 to the Federal Power Act, ch. 687, 49 Stat. 803, 846-47 (1935) (codified as amended at 16 U.S.C. § 824 (1994)).
84. Pub. L. No. 102-486, 106 Stat. 2776.
85. 16 U.S.C. § 824j(a) (1994). Section 211 now provides: Any electric utility, Federal power marketing agency, or any other person generating electric energy for sale for resale, may apply to the Commission for an order under this subsection requiring a transmitting utility to provide transmission services (including any enlargement of transmission capacity necessary to provide such services) to the applicant. Id.; see also Policy Statement Regarding Good Faith Requests for Transmission Services, 18 C.F.R. § 2.20 (1995).
86. See Energy Info. Admin., Electric Trade in the United States, 1992 (DOE/EIA-0531(92) 1994).
87. See Energy Info. Admin., Performance Issues for a Changing Electricity Power Industry 19-22 (1995).
88. See generally Larson, supra note 22, at 2-13; Larson, Kovacic & Mudd, supra note 22, at 434-37; Alexander C. Larson & Margarete Z. Starkey, Unbundling Issues and U.S. Telecommunications Policy, 6 Stan. L. & Pol'y Rev. 83 (1995).
89. See generally Larson, supra note 22, at 2-13; Larson, Kovacic & Mudd, supra note 22, at 434-37; Alexander C. Larson & Margarete Z. Starkey, Unbundling Issues and U.S. Telecommunications Policy, 6 Stan. L. & Pol'y Rev. 83 (1995).
90. See generally Larson, supra note 22, at 2-13; Larson, Kovacic & Mudd, supra note 22, at 434-37; Alexander C. Larson & Margarete Z. Starkey, Unbundling Issues and U.S. Telecommunications Policy, 6 Stan. L. & Pol'y Rev. 83 (1995).
91. The local wireline network traditionally consists of connections between customer premises and central offices, which are themselves connected. If each customer premise is connected to the central office by dedicated loops, resembling the spokes connected to the hub of a wheel, the network is said to have a "star" form. If the customers connect by dedicated loops to a trunk line running to the central office, the network has a "bus" form. Finally, if the customers are connected by dedicated loops to a circular trunk that originates and terminates at the central office, the network has a "ring" form. See George Calhoun, Wireless Access and the Local Telephone Network 396 (1992).
92. See id. at 69.
93. Peter W. Huber, Competition and Open Access in the Telecommunications Markets of California 7 (Feb. 8, 1994).
94. Id.
95. Armen A. Alchian, Cost, in 3 International Encyclopedia of the Social Sciences 404, 404 (David L. Sills ed., 1968).
96. Victor P. Goldberg, Relational Exchange: Economics and Complex Contracts, 23 Am. Behavioral Scientist 337, 340 (1980), reprinted in Readings in Contract Law 16, 18 (Victor P. Goldberg ed., 1989).
97. See Jean-Jacques Laffont & Jean Tirole, A Theory of Incentives in Procurement and Regulation 53-127 (1993).
98. Spulber, supra note 41, at 610.
99. Jean-Jacques Laffont and Jean Tirole observe, "In the absence of a detailed long-term contract, the regulated firm may refrain from investing in the fear that once the investment is in place, the regulator would pay only for variable cost and would not allow the firm to recoup its sunk cost." Laffont & Tirole, supra note 74, at 54.
100. 94 U.S. 113 (1877).
101. Id. at 129 (quoting Aldnutt v. Inglis, 12 East. 527, 541 (1810)).
102. 169 U.S. 466 (1898).
103. Id. at 546.
104. Id. at 547.
105. 320 U.S. 591 (1944).
106. Id. at 602.
107. Id. at 605.
108. 262 U.S. 679 (1923).
109. Id. at 692.
110. Id.
111. 390 U.S. 747 (1968).
112. Id. at 767.
113. Id. at 792.
114. Oliver E. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting 47 (1985) [hereinafter Williamson, Economic Institutions of Capitalism]; Oliver E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications 26 (1975) [hereinafter Williamson, Markets and Hierarchies].
115. Oliver E. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting 47 (1985) [hereinafter Williamson, Economic Institutions of Capitalism]; Oliver E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications 26 (1975) [hereinafter Williamson, Markets and Hierarchies].
116. Oliver E. Williamson, Franchise Bidding for Natural Monopolies - In General and with Respect to CATV, 7 Bell J. Econ. 73, 91 (1976).
117. Harold Demsetz, Why Regulate Utilities?, 11 J.L. & Econ. 55, 56-57 (1968).
118. Williamson, supra note 92, at 91-101.
119. See Mark A. Zupan, Cable Franchise Renewals: Do Incumbent Firms Behave Opportunistically?, 20 RAND J. Econ. 473, 475-76 (1989).
120. Paul Milgrom & John Roberts, Economics, Organization and Management 307 (1992).
121. Williamson, Economic Institutions of Capitalism, supra note 91, at 56.
122. Id. at 56 n.14.
123. Paul L. Joskow, Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence, 4 J.L. Econ. & Org. 95 (1988); Paul L. Joskow, Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets, 77 Am. Econ. Rev. 168 (1987); Paul L. Joskow, Vertical Integration and Long-Term Contracts: The Case of Coal-Burning Electric Generating Plants, 1 J.L. Econ. & Organization 33 (1985).
124. Paul L. Joskow, Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence, 4 J.L. Econ. & Org. 95 (1988); Paul L. Joskow, Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets, 77 Am. Econ. Rev. 168 (1987); Paul L. Joskow, Vertical Integration and Long-Term Contracts: The Case of Coal-Burning Electric Generating Plants, 1 J.L. Econ. & Organization 33 (1985).
125. Paul L. Joskow, Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence, 4 J.L. Econ. & Org. 95 (1988); Paul L. Joskow, Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets, 77 Am. Econ. Rev. 168 (1987); Paul L. Joskow, Vertical Integration and Long-Term Contracts: The Case of Coal-Burning Electric Generating Plants, 1 J.L. Econ. & Organization 33 (1985).
126. For a similar argument, see Timothy J. Brennan & James Boyd, Political Economy and the Efficiency of Compensation for Takings, Resources for the Future Discussion Paper 95-28, at 25 (June 1995) ("[T]here is the possibility of regulatory moral hazard . . . when the government can act opportunistically to capture the benefits of private investment through changes in regulatory policy.").
127. See, e.g., Milgrom & Roberts, supra note 96, at 133; Oliver E. Williamson, The Mechanisms of Governance 120-44 (1996); Williamson, Economic Institutions of Capitalism, supra note 91, at 167; Thomas C. Schelling, The Strategy of Conflict 22-28 (Harvard University Press 1968) (1960).
128. See, e.g., Milgrom & Roberts, supra note 96, at 133; Oliver E. Williamson, The Mechanisms of Governance 120-44 (1996); Williamson, Economic Institutions of Capitalism, supra note 91, at 167; Thomas C. Schelling, The Strategy of Conflict 22-28 (Harvard University Press 1968) (1960).
129. See, e.g., Milgrom & Roberts, supra note 96, at 133; Oliver E. Williamson, The Mechanisms of Governance 120-44 (1996); Williamson, Economic Institutions of Capitalism, supra note 91, at 167; Thomas C. Schelling, The Strategy of Conflict 22-28 (Harvard University Press 1968) (1960).
130. See, e.g., Milgrom & Roberts, supra note 96, at 133; Oliver E. Williamson, The Mechanisms of Governance 120-44 (1996); Williamson, Economic Institutions of Capitalism, supra note 91, at 167; Thomas C. Schelling, The Strategy of Conflict 22-28 (Harvard University Press 1968) (1960).
131. Pablo T. Spiller, Institutions and Regulatory Commitment in Utilities' Privatizations, 2 Indus. & Corp. Change 387 (1993); Shane Greenstein, Susan McMaster & Pablo T. Spiller, The Effect of Incentive Regulation on Infrastructure Modernization: Local Exchange Companies' Deployment of Digital Technology, 4 J. Econ. & Mgmt. Strategy 187, 189 (1995); Brian Levy & Pablo T. Spiller, The Institutional Foundations of Regulatory Commitment: A Comparative Analysis of Telecommunications Regulation, 10 J.L. Econ. & Organization 201, 204 (1994).
132. Pablo T. Spiller, Institutions and Regulatory Commitment in Utilities' Privatizations, 2 Indus. & Corp. Change 387 (1993); Shane Greenstein, Susan McMaster & Pablo T. Spiller, The Effect of Incentive Regulation on Infrastructure Modernization: Local Exchange Companies' Deployment of Digital Technology, 4 J. Econ. & Mgmt. Strategy 187, 189 (1995); Brian Levy & Pablo T. Spiller, The Institutional Foundations of Regulatory Commitment: A Comparative Analysis of Telecommunications Regulation, 10 J.L. Econ. & Organization 201, 204 (1994).
133. Pablo T. Spiller, Institutions and Regulatory Commitment in Utilities' Privatizations, 2 Indus. & Corp. Change 387 (1993); Shane Greenstein, Susan McMaster & Pablo T. Spiller, The Effect of Incentive Regulation on Infrastructure Modernization: Local Exchange Companies' Deployment of Digital Technology, 4 J. Econ. & Mgmt. Strategy 187, 189 (1995); Brian Levy & Pablo T. Spiller, The Institutional Foundations of Regulatory Commitment: A Comparative Analysis of Telecommunications Regulation, 10 J.L. Econ. & Organization 201, 204 (1994).
134. United States Trust Co. v. New Jersey, 431 U.S. 1, 17 n.14 (1977) (citations omitted).
135. E.g., Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 8-12 (1991); Roberta Romano, The Genius of American Corporate Law 1 (1993).
136. E.g., Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 8-12 (1991); Roberta Romano, The Genius of American Corporate Law 1 (1993).
137. Victor P. Goldberg, Regulation and Administered Contracts, 7 Bell J. Econ. 426, 428, 429 (1976).
138. Id. at 427.
139. See J. Gregory Sidak, The President's Power of the Purse, 1989 Duke L.J. 1162, 1235-38.
140. Williamson, Markets and Hierarchies, supra note 91, at 69; Oliver E. Williamson, Transaction-Cost Economics: The Governance of Contractual Relations, 22 J.L. & Econ. 233, 236-39 (1985).
141. Williamson, Markets and Hierarchies, supra note 91, at 69; Oliver E. Williamson, Transaction-Cost Economics: The Governance of Contractual Relations, 22 J.L. & Econ. 233, 236-39 (1985).
142. Spulber, supra note 41, at 85-86, 269-71.
143. Robert J. Michaels, Stranded Investment Surcharges: Inequitable and Inefficient, Pub. Util. Fort., May 15, 1995, at 21, 21. Presumably, Michaels is referring to New England Coalition on Nuclear Pollution v. Nuclear Regulatory Commission, 727 F.2d 1127, 1130 (D.C. Cir. 1984) (Scalia, J.) ("It may be possible to believe (though we do not pass upon the point), as the Commission evidently believed when it issued its proposed rule, that the very nature of government rate regulation - a compact whereby the utility surrenders its freedom to charge what the market will bear in exchange for the state's assurance of adequate profits - assures financial stability for public utilities."), and Washington Utilities & Transportation Commission v. Puget Sound Power & Light Co., 62 Pub. Util. Rep. 4th (PUR) 557, 581 (Wash. 1984) ("Understanding the dichotomy between the treatment of expenses prudently undertaken to provide service and providing a return on investment and that they are two separate matters is critical to the understanding of the regulatory compact and the operation of utilities.").
144. 36 U.S. (11 Pet.) 420 (1837).
145. 94 U.S. 113, 124 (1877).
146. Charles River Bridge, 36 U.S. (11 Pet.) at 538.
147. Id. at 548 (quoting Providence Bank v. Billings, 29 U.S. (4 Pet.) 514, 524 (1830)).
148. Id. at 548-49.
149. Id. at 549-53.
150. Id. at 550.
151. Id. at 551.
152. Id. at 558 (McLean, J., concurring).
153. Id. at 562 (McLean, J., concurring).
154. Id.
155. Id. at 565 (McLean, J., concurring).
156. Id. at 597 (Story, J., dissenting) (emphasis in original).
157. Id. at 646 (Story, J., dissenting).
158. Munn v. Illinois, 94 U.S. 113, 124 (1877).
159. Id.
160. Id. at 125.
161. Id. at 125-26 (quoting Lord Chief Justice Hale, De Portibus Maris, 1 Hargrave Law Tracts 45, 78 (Dublin 1787)).
162. Id. at 126.
163. Id. The Court explained that the owner could rescind his grant of property rights to the public: "He may withdraw his grant by discontinuing the use; but, so long as he maintains the use, he must submit to the control." Id. As our subsequent discussion of abandonment indicates, however, a public utility would subsequently be found to face barriers to withdrawing its property from public use, notwithstanding this language in Munn.
164. Richard Epstein's reading of Munn comports with our contractual interpretation of that decision. He observes that Chief Justice Waite "noted that traditional common carrier obligations imposed upon a party receiving a legal monopoly the obligation to charge only reasonable fees for the services rendered, where the restriction on the power to charge what one sees fit is the quid pro quo for the monopoly in question." Epstein, supra note 6, at 168 n.15.
165. Munn, 94 U.S. at 139-40 (Field, J., dissenting).
166. It is only where some right or privilege is conferred by the government or municipality upon the owner, which he can use in connection with his property, or by means of which the use of his property is rendered more valuable to him, or he thereby enjoys an advantage over others, that the compensation to be received by him becomes a legitimate matter of regulation. Submission to the regulation of compensation in such cases is an implied condition of the grant, and the State, in exercising its power of prescribing the compensation, only determines the conditions upon which its concession shall be enjoyed. When the privilege ends, the power of regulation ceases. Id. at 146-47 (Field, J., dissenting).
167. Id. at 148-49 (Field, J., dissenting).
168. George L. Priest, The Origins of Utility Regulation and the "Theories of Regulation" Debate, 36 J.L. & Econ. 289 (1993).
169. 21 U.S. (Wheat.) 1 (1823).
170. Id. at 92.
171. See EH W. Clemens, Economics and Public Utilities 72-74 (1950); Herbert B. Dorau, Materials for the Study of Public Utility Economics 2-8, 12-22, 31-49 (1930); William M. Ivins & Herbert Delavan Mason, The Control of Public Utilities 4-14 (1908); Joseph Asbury Joyce, A Treatise on Franchises 542-54 (1909); 1 Delos F. Wilcox, Municipal Franchises 1-3 (1910).
172. See EH W. Clemens, Economics and Public Utilities 72-74 (1950); Herbert B. Dorau, Materials for the Study of Public Utility Economics 2-8, 12-22, 31-49 (1930); William M. Ivins & Herbert Delavan Mason, The Control of Public Utilities 4-14 (1908); Joseph Asbury Joyce, A Treatise on Franchises 542-54 (1909); 1 Delos F. Wilcox, Municipal Franchises 1-3 (1910).
173. See EH W. Clemens, Economics and Public Utilities 72-74 (1950); Herbert B. Dorau, Materials for the Study of Public Utility Economics 2-8, 12-22, 31-49 (1930); William M. Ivins & Herbert Delavan Mason, The Control of Public Utilities 4-14 (1908); Joseph Asbury Joyce, A Treatise on Franchises 542-54 (1909); 1 Delos F. Wilcox, Municipal Franchises 1-3 (1910).
174. See EH W. Clemens, Economics and Public Utilities 72-74 (1950); Herbert B. Dorau, Materials for the Study of Public Utility Economics 2-8, 12-22, 31-49 (1930); William M. Ivins & Herbert Delavan Mason, The Control of Public Utilities 4-14 (1908); Joseph Asbury Joyce, A Treatise on Franchises 542-54 (1909); 1 Delos F. Wilcox, Municipal Franchises 1-3 (1910).
175. See EH W. Clemens, Economics and Public Utilities 72-74 (1950); Herbert B. Dorau, Materials for the Study of Public Utility Economics 2-8, 12-22, 31-49 (1930); William M. Ivins & Herbert Delavan Mason, The Control of Public Utilities 4-14 (1908); Joseph Asbury Joyce, A Treatise on Franchises 542-54 (1909); 1 Delos F. Wilcox, Municipal Franchises 1-3 (1910).
176. Priest, supra note 135, at 303.
177. Id. at 302.
178. Joyce, supra note 138, at 12 (quoting James Kent, Commentaries on American Law *458 (Boston, Little, Brown, & Co. 14th ed. 1896)).
179. 47 U.S. (6 How.) 507 (1848).
180. Id. at 512.
181. Id. at 533.
182. 70 U.S. (3 Wall.) 51 (1865).
183. Id. at 73-74.
184. U.S. Const. art. I, § 10, cl. 1 ("No State shall . . . pass any . . . Law impairing the Obligation of Contracts . . . .").
185. 94 U.S. 113 (1877).
186. Id. at 125-27.
187. 198 U.S. 45 (1905).
188. Id. at 58.
189. 115 U.S. 674 (1885).
190. Id. at 681-82.
191. Id. at 676-77.
192. Id. at 680-81.
193. 115 U.S. 650 (1885).
194. Id. at 660-61.
195. Id. at 662.
196. 172 U.S. 1 (1898).
197. Id. at 22-23.
198. Id. at 9.
199. It is true that in these cases the franchise was granted directly by the state legislature, but it is equally clear that such franchises may be bestowed upon corporations by the municipal authorities, provided the right to do so is given by their charters. State legislatures may not only exercise their sovereignty directly, but may delegate such portions of it to inferior legislative bodies as, in their judgment, is desirable for local purposes. Id.
200. Id. at 17.
201. Id.
202. Id. at 17-18.
203. 184 U.S. 368 (1902).
204. Id. at 397-98.
205. Id. at 384. Elsewhere the Court elaborated on the need for bilateral agreement to modify the contract price: The rate of fare having been fixed by positive agreement under the expressed legislative authority, the subject is not open to alteration thereafter by the common council alone, under the right to prescribe from time to time the rules and regulations for the running and operation of the road. Nor does the language of the ordinance, which provides that the rate of fare for one passenger shall not be more than five cents, give any right to the city to reduce it below the rate of five cents established by the company. It is a contract which gives the company the right to charge a rate of fare up to the sum of five cents for a single passenger, and leaves no power with the city to reduce it without the consent of the company. Id. at 389.
206. Id. at 384-85.
207. Priest, supra note 135, at 321.
208. [S]tate regulatory commissions were first created in the late 1880s (in Massachusetts) but then were inaugurated with sudden uniformity in the decade and a half following 1907. . . . [B]y 1922, electric regulatory commissions had been introduced in thirty-seven of the forty-eight states and gas commissions in eighteen of twenty large states. Id. at 296.
209. For a discussion of the horizontal integration of local exchange companies during that period, see generally Milton Mueller, Universal Service: Competition, Interconnection, and Monopoly in the Making of the American Telephone System (1996).
210. See, e.g., Cal. Pub. Util. Code § 311 (West 1996) (hearings, evidence, and decisions).
211. See Spulber, supra note 41, at 269-71.
212. Stephen G. Breyer, Regulation and Its Reform 291 (1982).
213. See Spulber, supra note 52, at 34-41, 43-45.
214. For further discussion, see, e.g., Breyer, supra note 174, at 15-34; Alfred E. Kahn, The Economics of Regulation: Principles and Institutions 3-14 (MIT Press rev. ed. 1988) (1970); Richard Schmalensee, The Control of Natural Monopolies 1-10 (1979); Spulber, supra note 41, at 603-10.
215. For further discussion, see, e.g., Breyer, supra note 174, at 15-34; Alfred E. Kahn, The Economics of Regulation: Principles and Institutions 3-14 (MIT Press rev. ed. 1988) (1970); Richard Schmalensee, The Control of Natural Monopolies 1-10 (1979); Spulber, supra note 41, at 603-10.
216. For further discussion, see, e.g., Breyer, supra note 174, at 15-34; Alfred E. Kahn, The Economics of Regulation: Principles and Institutions 3-14 (MIT Press rev. ed. 1988) (1970); Richard Schmalensee, The Control of Natural Monopolies 1-10 (1979); Spulber, supra note 41, at 603-10.
217. For further discussion, see, e.g., Breyer, supra note 174, at 15-34; Alfred E. Kahn, The Economics of Regulation: Principles and Institutions 3-14 (MIT Press rev. ed. 1988) (1970); Richard Schmalensee, The Control of Natural Monopolies 1-10 (1979); Spulber, supra note 41, at 603-10.
218. 320 U.S. 591 (1944). Hope applies an "end-result" test that evaluates the financial impacts of regulation based on their net effects on the firm's profits on its regulated activities. See supra notes 82-84 and accompanying text.
219. See United States v. Colgate & Co., 250 U.S. 300, 307 (1919).
220. See id.
221. For a theoretical exposition of that proposition by a former state regulatory commissioner, see Eli Noam, Telecommunications in Europe 26-42 (1992). The regulatory universal-service objective can be due to other motivations, however, including political considerations.
222. 245 U.S. 345 (1917).
223. Id. at 346.
224. See id. at 349. The Court explained that: The community of Douglaston . . . was a rapidly growing settlement of three hundred and thirty houses, of an average cost of $7,500, thus giving assurance that the occupiers of them would be probable users of gas, and which, with very few exceptions, were occupied by families the entire year. While the community is described in the assignment of error as "independent and remote" the record shows that it was served at the time by franchise holding companies, which supplied water, electric light and telephone to its inhabitants, and that the number of houses had doubled within a few years. Id.
225. Id. at 349-50.
226. Id. at 351.
227. Id.; see also Richard J. Pierce, Jr., Economic Regulation: Cases and Materials 169-70 (1994).
228. See Baumol & Sidak, Toward Competition in Local Telephony, supra note 39, at 57, 81-83; William J. Baumol, Superfairness: Applications and Theory 113-20 (1986). Alternatively, a break-even regulated rate structure is said to be free of cross-subsidies if and only if the prices satisfy the stand-alone cost test. See Baumol, Panzar & Willig, supra note 41, at 352-53; Baumol & Sidak, Toward Competition in Local Telephony, supra note 39, at 81-83. Stand-alone cost refers to the firm's long-run total cost of each service operated separately. The stand-alone cost test requires that the revenues generated from either of two services not exceed the stand-alone cost of providing that service. If the revenues from one service do exceed its stand-alone cost, then that service is providing a cross-subsidy to the other service. (The definition of the stand-alone cost test is given in terms of two services. In the case of more than two services, the test requires that no group of services subsidizes any other group of services.) The test for cross-subsidization demonstrates that the customers of the service providing the cross-subsidy would be better off if that service could be obtained independently of the other service.
229. See Baumol & Sidak, Toward Competition in Local Telephony, supra note 39, at 57, 81-83; William J. Baumol, Superfairness: Applications and Theory 113-20 (1986). Alternatively, a break-even regulated rate structure is said to be free of cross-subsidies if and only if the prices satisfy the stand-alone cost test. See Baumol, Panzar & Willig, supra note 41, at 352-53; Baumol & Sidak, Toward Competition in Local Telephony, supra note 39, at 81-83. Stand-alone cost refers to the firm's long-run total cost of each service operated separately. The stand-alone cost test requires that the revenues generated from either of two services not exceed the stand-alone cost of providing that service. If the revenues from one service do exceed its stand-alone cost, then that service is providing a cross-subsidy to the other service. (The definition of the stand-alone cost test is given in terms of two services. In the case of more than two services, the test requires that no group of services subsidizes any other group of services.) The test for cross-subsidization demonstrates that the customers of the service providing the cross-subsidy would be better off if that service could be obtained independently of the other service.
230. See Baumol & Sidak, Toward Competition in Local Telephony, supra note 39, at 57, 81-83; William J. Baumol, Superfairness: Applications and Theory 113-20 (1986). Alternatively, a break-even regulated rate structure is said to be free of cross-subsidies if and only if the prices satisfy the stand-alone cost test. See Baumol, Panzar & Willig, supra note 41, at 352-53; Baumol & Sidak, Toward Competition in Local Telephony, supra note 39, at 81-83. Stand-alone cost refers to the firm's long-run total cost of each service operated separately. The stand-alone cost test requires that the revenues generated from either of two services not exceed the stand-alone cost of providing that service. If the revenues from one service do exceed its stand-alone cost, then that service is providing a cross-subsidy to the other service. (The definition of the stand-alone cost test is given in terms of two services. In the case of more than two services, the test requires that no group of services subsidizes any other group of services.) The test for cross-subsidization demonstrates that the customers of the service providing the cross-subsidy would be better off if that service could be obtained independently of the other service.
231. See Baumol & Sidak, Toward Competition in Local Telephony, supra note 39, at 57, 81-83; William J. Baumol, Superfairness: Applications and Theory 113-20 (1986). Alternatively, a break-even regulated rate structure is said to be free of cross-subsidies if and only if the prices satisfy the stand-alone cost test. See Baumol, Panzar & Willig, supra note 41, at 352-53; Baumol & Sidak, Toward Competition in Local Telephony, supra note 39, at 81-83. Stand-alone cost refers to the firm's long-run total cost of each service operated separately. The stand-alone cost test requires that the revenues generated from either of two services not exceed the stand-alone cost of providing that service. If the revenues from one service do exceed its stand-alone cost, then that service is providing a cross-subsidy to the other service. (The definition of the stand-alone cost test is given in terms of two services. In the case of more than two services, the test requires that no group of services subsidizes any other group of services.) The test for cross-subsidization demonstrates that the customers of the service providing the cross-subsidy would be better off if that service could be obtained independently of the other service.
232. The incremental cost test is defined here for only two services. In the case of more than two services, the revenues generated by each group of services must cover the incremental cost of providing that group of services.
233. See Leonard S. Hyman, America's Electric Utilities: Past, Present and Future 30 (5th ed. 1994).
234. Luke 15:11-32;
235. see, e.g., Backup and Maintenance Rates and the Treatment of Stranded Costs, 152 Pub. Util. Rep. 4th (PUR) 349, 353 (Me. Pub. Utils. Comm'n 1994) (asking if "some sort of 'prodigal son' penalty" should be imposed upon customer's return).
236. See William K. Jones, Cases and Materials on Regulated Industries 385-88 (1967); Charles F. Phillips, Jr., The Regulation of Public Utilities: Theory and Practice 570 (3d ed. 1993) ("Voluntary abandonment, either partial or complete, must be approved by the regulatory commissions."); Oliver P. Field, The Withdrawal from Service of Public Utility Companies, 35 Yale L.J. 169, 170-72 (1925); Ford P. Hall, Discontinuance of Service by Public Utilities, 13 Minn. L. Rev. 181 (1929); Note, The Duty of a Public Utility to Render Adequate Service: Its Scope and Enforcement, 62 Colum. L. Rev. 312, 319-22 (1962).
237. See William K. Jones, Cases and Materials on Regulated Industries 385-88 (1967); Charles F. Phillips, Jr., The Regulation of Public Utilities: Theory and Practice 570 (3d ed. 1993) ("Voluntary abandonment, either partial or complete, must be approved by the regulatory commissions."); Oliver P. Field, The Withdrawal from Service of Public Utility Companies, 35 Yale L.J. 169, 170-72 (1925); Ford P. Hall, Discontinuance of Service by Public Utilities, 13 Minn. L. Rev. 181 (1929); Note, The Duty of a Public Utility to Render Adequate Service: Its Scope and Enforcement, 62 Colum. L. Rev. 312, 319-22 (1962).
238. See William K. Jones, Cases and Materials on Regulated Industries 385-88 (1967); Charles F. Phillips, Jr., The Regulation of Public Utilities: Theory and Practice 570 (3d ed. 1993) ("Voluntary abandonment, either partial or complete, must be approved by the regulatory commissions."); Oliver P. Field, The Withdrawal from Service of Public Utility Companies, 35 Yale L.J. 169, 170-72 (1925); Ford P. Hall, Discontinuance of Service by Public Utilities, 13 Minn. L. Rev. 181 (1929); Note, The Duty of a Public Utility to Render Adequate Service: Its Scope and Enforcement, 62 Colum. L. Rev. 312, 319-22 (1962).
239. See William K. Jones, Cases and Materials on Regulated Industries 385-88 (1967); Charles F. Phillips, Jr., The Regulation of Public Utilities: Theory and Practice 570 (3d ed. 1993) ("Voluntary abandonment, either partial or complete, must be approved by the regulatory commissions."); Oliver P. Field, The Withdrawal from Service of Public Utility Companies, 35 Yale L.J. 169, 170-72 (1925); Ford P. Hall, Discontinuance of Service by Public Utilities, 13 Minn. L. Rev. 181 (1929); Note, The Duty of a Public Utility to Render Adequate Service: Its Scope and Enforcement, 62 Colum. L. Rev. 312, 319-22 (1962).
240. See William K. Jones, Cases and Materials on Regulated Industries 385-88 (1967); Charles F. Phillips, Jr., The Regulation of Public Utilities: Theory and Practice 570 (3d ed. 1993) ("Voluntary abandonment, either partial or complete, must be approved by the regulatory commissions."); Oliver P. Field, The Withdrawal from Service of Public Utility Companies, 35 Yale L.J. 169, 170-72 (1925); Ford P. Hall, Discontinuance of Service by Public Utilities, 13 Minn. L. Rev. 181 (1929); Note, The Duty of a Public Utility to Render Adequate Service: Its Scope and Enforcement, 62 Colum. L. Rev. 312, 319-22 (1962).
241. See, e.g., Fort Smith Light & Traction Co. v. Bourland, 267 U.S. 330, 332-33 (1925); Crawford v. Duluth St. Ry., 60 F.2d 212, 215 (7th Cir. 1932); Iowa v. Old Colony Trust Co., 215 F. 307 (8th Cir. 1914); City of Columbus Ry. Power & Light Co. v. Columbus, 253 F. 499, 505 (S.D. Ohio 1918), aff'd, 249 U.S. 399 (1919); Northern Ill. Light & Traction Co. v. Commerce Comm'n, 134 N.E. 142, 147 (Ill. 1922); City of Salina v. Salina St. Ry., 220 P. 203, 205 (Kan. 1923). The Supreme Court stated in Texas Railroad Commission v. Eastern Texas Railroad, 264 U.S. 79 (1924), that "if at any time it develops with reasonable certainty that future operations must be at a loss, the company may discontinue operation and get what it can out of the property by dismantling the road." Id. at 85. To require otherwise would effect a confiscation of property: "To compel it to go on at a loss, or to give up the salvage value, would be to take its property without just compensation which is a part of due process of law." Id.
242. Columbus Ry. Power & Light Co., 253 F. at 505.
243. See William Bishop, The Choice of Remedy for Breach of Contract, 14 J. Legal Stud. 299, 307 (1985); Anthony T. Kronman, Specific Performance, 45 U. Chi. L. Rev. 351, 357-58 (1978); Alan Schwartz, The Case for Specific Performance, 89 Yale L.J. 271, 272 (1979); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121, 146 (1984); Thomas S. Ulen, The Efficiency of Specific Performance: Toward a Unified Theory of Contract Remedies, 83 Mich. L. Rev. 341, 364 (1983).
244. See William Bishop, The Choice of Remedy for Breach of Contract, 14 J. Legal Stud. 299, 307 (1985); Anthony T. Kronman, Specific Performance, 45 U. Chi. L. Rev. 351, 357-58 (1978); Alan Schwartz, The Case for Specific Performance, 89 Yale L.J. 271, 272 (1979); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121, 146 (1984); Thomas S. Ulen, The Efficiency of Specific Performance: Toward a Unified Theory of Contract Remedies, 83 Mich. L. Rev. 341, 364 (1983).
245. See William Bishop, The Choice of Remedy for Breach of Contract, 14 J. Legal Stud. 299, 307 (1985); Anthony T. Kronman, Specific Performance, 45 U. Chi. L. Rev. 351, 357-58 (1978); Alan Schwartz, The Case for Specific Performance, 89 Yale L.J. 271, 272 (1979); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121, 146 (1984); Thomas S. Ulen, The Efficiency of Specific Performance: Toward a Unified Theory of Contract Remedies, 83 Mich. L. Rev. 341, 364 (1983).
246. See William Bishop, The Choice of Remedy for Breach of Contract, 14 J. Legal Stud. 299, 307 (1985); Anthony T. Kronman, Specific Performance, 45 U. Chi. L. Rev. 351, 357-58 (1978); Alan Schwartz, The Case for Specific Performance, 89 Yale L.J. 271, 272 (1979); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121, 146 (1984); Thomas S. Ulen, The Efficiency of Specific Performance: Toward a Unified Theory of Contract Remedies, 83 Mich. L. Rev. 341, 364 (1983).
247. See William Bishop, The Choice of Remedy for Breach of Contract, 14 J. Legal Stud. 299, 307 (1985); Anthony T. Kronman, Specific Performance, 45 U. Chi. L. Rev. 351, 357-58 (1978); Alan Schwartz, The Case for Specific Performance, 89 Yale L.J. 271, 272 (1979); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121, 146 (1984); Thomas S. Ulen, The Efficiency of Specific Performance: Toward a Unified Theory of Contract Remedies, 83 Mich. L. Rev. 341, 364 (1983).
248. See, e.g., Mississippi R.R. Comm'n v. Mobile & O.R.R. Co., 244 U.S. 388, 395-96 (1917); State ex rel. Kirkwood v. Public Serv. Comm'n, 50 S.W.2d 114, 116 (Mo. 1932).
249. Cincinnati N.R.R. v. Public Utils. Comm'n, 165 N.B. 38, 41 (Ohio 1929) (railroad passengers adequately served by bus); Union Pac. R.R. v. Public Serv. Comm'n, 132 P.2d 128, 130 (Utah 1942) (same).
250. See Dan B. Dobbs, Handbook on the Law of Remedies: Damages, Equity, Restitution 786-88 (1973); E. Allan Farnsworth, Legal Remedies for Breach of Contract, 70 Colum. L. Rev. 1145, 1148 (1970); L.L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages: 1, 46 Yale L.J. 52, 52-53 (1936).
251. See Dan B. Dobbs, Handbook on the Law of Remedies: Damages, Equity, Restitution 786-88 (1973); E. Allan Farnsworth, Legal Remedies for Breach of Contract, 70 Colum. L. Rev. 1145, 1148 (1970); L.L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages: 1, 46 Yale L.J. 52, 52-53 (1936).
252. See Dan B. Dobbs, Handbook on the Law of Remedies: Damages, Equity, Restitution 786-88 (1973); E. Allan Farnsworth, Legal Remedies for Breach of Contract, 70 Colum. L. Rev. 1145, 1148 (1970); L.L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages: 1, 46 Yale L.J. 52, 52-53 (1936).
253. The following discussion expands that found in Baumol & Sidak, supra note 17, at 111-13.
254. For discussion of the common law duty to mitigate contract damages, see Rich v. Daily Creamery Co., 296 N.W. 253 (Mich. 1941); Sauer v. McClintic Marshall Constr. Co., 146 N.W. 422 (Mich. 1914); Restatement (Second) of Contracts § 350 cmt. b (1979).
255. See generally David E.M. Sappington & Dennis L. Weisman, Designing Incentive Regulation for the Telecommunications Industry (1996).
256. See, e.g., Cal. Pub. Util. Code § 2882.3 (West Supp. 1996); Va. Code Ann. § 56-235.5 (Michie Supp. 1996).
257. See, e.g., Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming Regulation, 151 Pub. Util. Rep. 4th (PUR) 73 (Cal. Pub. Utils. Comm'n 1994); Alternative Regulatory Frameworks for Local Exchange Carriers, 107 Pub. Util. Rep. 4th (PUR) 1, 41 (Cal. Pub. Utils. Comm'n 1989); New England Tel. & Tel. Co., 153 Pub. Util. Rep. 4th (PUR) 355, 363 (Mass. Dep't Pub. Utils. 1994); New England Tel. & Tel. Co., 123 Pub. Util. Rep. 4th (PUR) 289, 305 (N.H. Pub. Utils. Comm'n 1991); Comprehensive Review of Telecommunications, 138 Pub. Util. Rep. 4th (PUR) 620 (R.I. Pub. Utils. Comm'n 1992).
258. See, e.g., Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming Regulation, 151 Pub. Util. Rep. 4th (PUR) 73 (Cal. Pub. Utils. Comm'n 1994); Alternative Regulatory Frameworks for Local Exchange Carriers, 107 Pub. Util. Rep. 4th (PUR) 1, 41 (Cal. Pub. Utils. Comm'n 1989); New England Tel. & Tel. Co., 153 Pub. Util. Rep. 4th (PUR) 355, 363 (Mass. Dep't Pub. Utils. 1994); New England Tel. & Tel. Co., 123 Pub. Util. Rep. 4th (PUR) 289, 305 (N.H. Pub. Utils. Comm'n 1991); Comprehensive Review of Telecommunications, 138 Pub. Util. Rep. 4th (PUR) 620 (R.I. Pub. Utils. Comm'n 1992).
259. As the commission defines it, the new regulatory framework is an incentive-based regulatory framework "centered around a price cap indexing mechanism with sharing of excess earnings above a benchmark rate of return level." Alternative Regulatory Frameworks for Local Exchange Carriers, 107 Pub. Util. Rep. 4th (PUR) at 13.
260. Id. at 153.
261. Id. at 88.
262. See Richard A. Posner & Andrew M. Rosenfield, Impossibility and Related Doctrines in Contract Law: An Economic Analysis, 6 J. Legal Stud. 83, 89-90 (1977).
263. For a discussion of this problem in the guise of disallowances of prudently incurred capital investments, see Richard J. Pierce, Jr., The Regulatory Treatment of Mistakes in Retrospect: Canceled Plants and Excess Capacity, 132 U. Pa. L. Rev. 497, 511-17 (1984).
264. Restatement (Second) of Contracts §§ 376, 384 (1981); Restatement of Restitution § 150 (1937); Dobbs, supra note 197, at 266, 722, 741.
265. Restatement (Second) of Contracts § 90(1) (1979). An earlier version of the same general notion appeared in Restatement of Contracts § 90 (1932). See generally Robert Birmingham, Notes on the Reliance Interest, 60 Wash. L. Rev. 217 (1985); Melvin A. Eisenberg, Donative Promises, 47 U. Chi. L. Rev. 1 (1979); Jay M. Feinman, Promissory Estoppel and Judicial Method, 97 Harv. L. Rev. 678 (1984); Richard A. Posner, Gratuitous Promises in Economics and Law, 6 J. Legal Stud. 411 (1977).
266. Restatement (Second) of Contracts § 90(1) (1979). An earlier version of the same general notion appeared in Restatement of Contracts § 90 (1932). See generally Robert Birmingham, Notes on the Reliance Interest, 60 Wash. L. Rev. 217 (1985); Melvin A. Eisenberg, Donative Promises, 47 U. Chi. L. Rev. 1 (1979); Jay M. Feinman, Promissory Estoppel and Judicial Method, 97 Harv. L. Rev. 678 (1984); Richard A. Posner, Gratuitous Promises in Economics and Law, 6 J. Legal Stud. 411 (1977).
267. Restatement (Second) of Contracts § 90(1) (1979). An earlier version of the same general notion appeared in Restatement of Contracts § 90 (1932). See generally Robert Birmingham, Notes on the Reliance Interest, 60 Wash. L. Rev. 217 (1985); Melvin A. Eisenberg, Donative Promises, 47 U. Chi. L. Rev. 1 (1979); Jay M. Feinman, Promissory Estoppel and Judicial Method, 97 Harv. L. Rev. 678 (1984); Richard A. Posner, Gratuitous Promises in Economics and Law, 6 J. Legal Stud. 411 (1977).
268. Restatement (Second) of Contracts § 90(1) (1979). An earlier version of the same general notion appeared in Restatement of Contracts § 90 (1932). See generally Robert Birmingham, Notes on the Reliance Interest, 60 Wash. L. Rev. 217 (1985); Melvin A. Eisenberg, Donative Promises, 47 U. Chi. L. Rev. 1 (1979); Jay M. Feinman, Promissory Estoppel and Judicial Method, 97 Harv. L. Rev. 678 (1984); Richard A. Posner, Gratuitous Promises in Economics and Law, 6 J. Legal Stud. 411 (1977).
269. Feinman, supra note 209, at 691 n.59 ("[P]romissory estoppel cases now arise chiefly in commercial contracts
270. Id. at 688.
271. See, e.g., Walters v. Marathon Oil Co., 642 F.2d 1098, 1100-01 (7th Cir. 1981); Universal Computer Sys., Inc. v. Medical Servs. Ass'n, 628 F.2d 820, 824-25 (3d Cir. 1980); Arnold's Hofbrau, Inc. v. George Hyman Constr. Co., 480 F.2d 1145, 1148 (D.C. Cir. 1973); Walker v. KFC Corp., 515 F. Supp. 612, 617 (S.D. Cal. 1981).
272. Restatement (Second) of Contracts § 2 (1979).
273. See, e.g., 5 U.S.C. § 553 (1994).
274. Motor Vehicle Mfrs. Ass'n of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983).
275. Restatement (Second) of Contracts § 2 (1979).
276. Id. Feinman notes that: The standard . . . is not whether the promisor clearly made a promise, but whether, given the context in which the statement at issue was made, the promisor should reasonably have expected that the promisee would infer a promise. This standard may be met not only by a particular promise or representation, but also by general statements of policy or practice . . . . Feinman, supra note 209, at 692.
277. See Richard A. Epstein, Takings: Of Private Property and Common, 64 U. Chi. L. Rev. (forthcoming winter 1997).
278. See, e.g., Richard A. Posner, Economic Analysis of Law § 3.1, at 33 (4th ed. 1992).
279. 114 S. Ct. 2309 (1994).
280. Id. at 2316 (quoting Kaiser Aetna v. United States, 444 U.S. 164, 176 (1979)).
281. Posner, supra note 219, § 3.1, at 32 (citing 2 William Blackstone, Commentaries *4, *7).
282. See generally Essays in the Economics of Renewable Resources (Leonard J. Mirman & Daniel F. Spulber eds., 1982).
283. See, e.g., id.
284. See generally Garrett Hardin, The Tragedy of the Commons, 162 Sci. 1243 (1968).
285. 482 U.S. 304 (1987).
286. Id. at 315 (emphasis in original).
287. 444 U.S. 51 (1979).
288. Id. at 65 (emphasis in original); accord Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 124 (1978); Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 413 (1922).
289. Pennsylvania Coal, 260 U.S. at 413.
290. Id.
291. This can take the form of holdouts when the last property owner of a group of properties necessary to effectuate the public use asks for compensation in excess of the alternative use or market value of his single piece of property. See id.
292. 364 U.S. 40 (1960).
293. Id. at 49. The enunciation of that principle has become boilerplate in the Court's subsequent takings cases. See, e.g., Dolan v. City of Tigard, 114 S. Ct. 2309, 2316 (1994); Pennell v. City of San Jose, 485 U.S. 1, 9 (1988); First English Evangelical Lutheran Church v. County of L.A., 482 U.S. 304, 318-19 (1987); Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 163 (1980); Agins v. Tiburon, 447 U.S. 255, 260 (1980); Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 123 (1978). Judge Jay Plager of the Federal Circuit recently expressed the principle as follows: The question at issue here is, when the Government fulfills its obligation to preserve and protect the public interest, may the cost of obtaining that public benefit fall solely upon the affected property owner, or is it to be shared by the community at large. In the final analysis the answer to that question is one of fundamental public policy. It calls for balancing the legitimate claims of the society to constrain individual actions that threaten the larger community, on the one side, and, on the other, the rights of the individual and our commitment to private property as a bulwark for the protection of those rights. It requires us to decide which collective rights are to be obtained at collective cost, in order better to preserve collectively the rights of the individual. Loveladies Harbor, Inc. v. United States, 28 F.3d 1171, 1175 (Fed. Cir. 1994) (footnote omitted). For an early articulation of the principle, see Monongahela Navigation Co. v. United States, 148 U.S. 312, 325 (1893).
294. See Baumol, supra note 187, at 7-9, 30-37.
295. 123 U.S. 623 (1887).
296. See, e.g., Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1022 (1992).
297. See Jules L. Coleman, Markets, Morals and the Law 81-86 (1988); Fischel, supra note 2, § 2.2, at 68; Posner, supra note 219, § 1.2, at 13-14.
298. See Jules L. Coleman, Markets, Morals and the Law 81-86 (1988); Fischel, supra note 2, § 2.2, at 68; Posner, supra note 219, § 1.2, at 13-14.
299. See Jules L. Coleman, Markets, Morals and the Law 81-86 (1988); Fischel, supra note 2, § 2.2, at 68; Posner, supra note 219, § 1.2, at 13-14.
300. See Nicholas Kaldor, Welfare Propositions of Economics and Interpersonal Comparisons of Utility, 49 Econ. J. 549 (1939); see also John R. Hicks, Foundations of Welfare Economics, 49 Econ. J. 696 (1939). A related contemporaneous paper is T. de Scitovsky, A Note on Welfare Propositions in Economics, 9 Rev. Econ. Stud. 77 (1941), and a more modern treatment appears in E.J. Mishan, Introduction to Normative Economics 303-14 (1981).
301. See Nicholas Kaldor, Welfare Propositions of Economics and Interpersonal Comparisons of Utility, 49 Econ. J. 549 (1939); see also John R. Hicks, Foundations of Welfare Economics, 49 Econ. J. 696 (1939). A related contemporaneous paper is T. de Scitovsky, A Note on Welfare Propositions in Economics, 9 Rev. Econ. Stud. 77 (1941), and a more modern treatment appears in E.J. Mishan, Introduction to Normative Economics 303-14 (1981).
302. See Nicholas Kaldor, Welfare Propositions of Economics and Interpersonal Comparisons of Utility, 49 Econ. J. 549 (1939); see also John R. Hicks, Foundations of Welfare Economics, 49 Econ. J. 696 (1939). A related contemporaneous paper is T. de Scitovsky, A Note on Welfare Propositions in Economics, 9 Rev. Econ. Stud. 77 (1941), and a more modern treatment appears in E.J. Mishan, Introduction to Normative Economics 303-14 (1981).
303. See Nicholas Kaldor, Welfare Propositions of Economics and Interpersonal Comparisons of Utility, 49 Econ. J. 549 (1939); see also John R. Hicks, Foundations of Welfare Economics, 49 Econ. J. 696 (1939). A related contemporaneous paper is T. de Scitovsky, A Note on Welfare Propositions in Economics, 9 Rev. Econ. Stud. 77 (1941), and a more modern treatment appears in E.J. Mishan, Introduction to Normative Economics 303-14 (1981).
304. Although that metamorphosis is most closely associated with the year 1937, see West Coast Hotel Co. v. Parrish, 300 U.S. 379 (1937); NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1 (1937), the process can be thought to have spanned nearly a decade. By 1937, the Court had already diluted the Contract Clause in Home Building & Loan Association v. Blaisdell, 290 U.S. 398 (1934). The crown jewel of the Court's modern jurisprudence, footnote 4 of United States v. Carolene Products Co., 304 U.S. 144 (1938), came a year later, and Wickard v. Filburn, 317 U.S. 111 (1942), eliminated any practical constraint on the scope of the federal commerce power. That development stood unchecked for more than half a century, until United States v. Lopez, 115 S. Ct. 1624 (1995).
305. The result will be reminiscent of the well-recognized dissipation of monopoly rents by firms competing to achieve a monopoly. See Richard A. Posner, The Social Costs of Monopoly and Regulation, 83 J. Pol. Econ. 807, 807-08 (1975).
306. A counterargument in favor of no payment of compensation is that the certainty that losers will receive compensation for regulatory changes will induce moral hazard on the part of property owners. See Lawrence E. Blume, Daniel L. Rubinfeld & Perry Shapiro, The Taking of Land: When Should Compensation Be Paid?, 99 Q.J. Econ. 71, 71 (1984). The empirical substantiality of such moral hazard is open to question, however, particularly in relation to the moral hazard likely to arise from more explicit forms of government insurance. For example, which is more likely to induce risk taking on the part of property owners along the South Carolina coast: the availability of federal disaster relief for hurricane damage, or the requirement that the state pay compensation for environmental regulations that it imposes?
307. See Armstrong v. United States, 364 U.S. 40, 49 (1960).
308. Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922).
309. Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 124 (1978).
310. See, e.g., Prune Yard Shopping Ctr. v. Robins, 447 U.S. 74, 83 (1980); Kaiser Aetna v. United States, 444 U.S. 164, 174-75 (1979).
311. See Fischel, supra note 2, § 1.18, at 51; Andrea L. Peterson, The Takings Clause: In Search of Underlying Principles, Part I, A Critique of the Current Takings Clause Doctrine, 77 Cal. L. Rev. 1299, 1317 (1989).
312. See Fischel, supra note 2, § 1.18, at 51; Andrea L. Peterson, The Takings Clause: In Search of Underlying Principles, Part I, A Critique of the Current Takings Clause Doctrine, 77 Cal. L. Rev. 1299, 1317 (1989).
313. 28 F.3d 1171 (Fed. Cir. 1994).
314. Id. at 1176.
315. Id. (citing Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1014 (1984)).
316. Id. (citing Nollan v. California Coastal Comm'n, 483 U.S. 825, 837 (1987)).
317. Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 413 (1992). In Loveladies, 28 F.3d at 1176-77, Judge Plager imputed just such a meaning to Justice Holmes's remark.
318. Loveladies, 28 F.3d at 1177 (citing Agins v. Tiburon, 447 U.S. 255, 260 (1980); Nollan, 483 U.S. at 834)).
319. Id.
320. Id.
321. Id.
322. 467 U.S. 986 (1984).
323. Id. at 1005-06 (quoting Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 161 (1980)). Loveladies also quotes the Ruckleshaus observation. Loveladies, 28 F.3d at 1177.
324. 428 U.S. 1 (1976).
325. Id. at 16.
326. See Concrete Pipe & Prods., Inc. v. Construction Laborers Pension Trust, 508 U.S. 602, 646-47 (1993); Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 226-27 (1986); see also Golden Pac. Bancorp v. United States, 15 F.3d 1066, 1074-75 (Fed. Cir. 1994).
327. Chang v. United States, 859 F.2d 893 (Fed. Cir. 1988).
328. Id. at 896.
329. Id. at 897.
330. Id.
331. Id.
332. Id.
333. Id.
334. 458 U.S. 419 (1982).
335. Id. at 421.
336. Id. at 434-35 (citation omitted) (quoting Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 124 (1978)).
337. Id. at 423.
338. Id.
339. Id. at 422 (quoting Loretto v. Teleprompter Manhattan CATV Corp., 423 N.E.2d 320, 324 (N.Y. 1981)).
340. Id. Actually, two buildings were involved, but we have simplified the facts here.
341. Id. at 426 ("[A] permanent physical occupation authorized by government is a taking without regard to the public interests that it may serve.").
342. Id. (quoting Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 124 (1978)).
343. Id.
344. Id. at 427. In reaching its conclusion regarding physical occupations, the Court distinguished Pumpelly v. Green Bay Co., 80 U.S. (13 Wall.) 166 (1872) (permanent flooding of private property), from Northern Transportation Co. v. Chicago, 99 U.S. 635 (1879) (temporary flooding of private property). Loretto, 458 U.S. at 427-28. The Court also emphasized its point by relying on additional decisions in which it had predicated the finding of a taking on the permanent flooding of private property. Id. at 428 (citing United States v. Kansas City Life Ins. Co., 339 U.S. 799, 809-10 (1950); Sanguinetti v. United States, 264 U.S. 146, 149 (1924); United States v. Cress, 243 U.S. 316, 327-28 (1917); Bedford v. United States, 192 U.S. 217, 225 (1904); United States v. Lynah, 188 U.S. 445, 468-70 (1903)).
345. Loretta, 458 U.S. at 427 n.5 (emphasis in original) (quoting Frank I. Michelman, Property, Utility, and Fairness: Comments on the Ethical Foundations of "Just Compensation" Law, 80 Harv. L. Rev. 1165, 1184 (1967)).
346. Id. at 432. The Court likened its rule on permanent physical invasion to a per se rule in antitrust law. Id. at 435 n.12.
347. Id. at 438-41.
348. Id. at 436-37.
349. Id. at 438 n.16.
350. Id. at 435-38.
351. Id. at 435 (quoting United States v. General Motors Corp., 323 U.S. 373, 378 (1945)).
352. Id. at 435-36 (citing Kaiser Aetna v. United States, 444 U.S. 164, 179-80 (1979); Restatement of Property § 7 (1936)).
353. Id. at 436 (citing Andrus v. Allard, 444 U.S. 51, 66 (1979)).
354. 148 U.S. 312 (1893).
355. Id. at 345.
356. Loretto, 458 U.S. at 436.
357. Id. (emphasis in original).
358. Id. "To require, as well, that the owner permit another to exercise complete dominion literally adds insult to injury." Id. (citing Michelman, supra note 280, at 1228 & n.110).
359. Id. at 441.
360. 480 U.S. 245 (1987).
361. 47 U.S.C. § 224 (1994).
362. Id. The Telecommunications Act of 1996 made such access mandatory and specified the method for computing compensation for it. Thus, a new wave of pole attachment cases may arise for which Florida Power Corp. will no longer be dispositive.
363. Florida Power Corp., 480 U.S. at 250-53.
364. Id. at 252. In 1992 the Court reinforced that rationale: Property owners who "voluntarily open their property to occupation by others . . . cannot assert a per se right to compensation based on their inability to exclude particular individuals." Yee v. City of Escondido, 503 U.S. 519, 531 (1992).
365. See Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 428-30 (1982) (citing Portsmouth Harbor Land & Hotel Co. v. United States, 260 U.S. 327 (1922); Western Union Tel. Co. v. Pennsylvania R.R. Co., 195 U.S. 540 (1904); St. Louis v. Western Union Tel. Co., 148 U.S. 92 (1893); Southwestern Bell Tel. Co. v. Webb, 393 S.W.2d 117 (Mo. Ct. App. 1965); Lovett v. West Va. Cent. Gas Co., 65 S.E. 196 (W. Va. 1909)).
366. GTE Northwest, Inc. v. Public Util. Comm'n, 900 P.2d 495, 501-06 (Or. 1995), cert. denied, 116 S. Ct. 1541 (1996).
367. Id. at 504.
368. See Baumol & Sidak, Toward Competition in Local Telephony, supra note 39, at 95-96 (citing St. Louis S.W. Ry. - Trackage Rights over Mo. Pac. R.R. - Kansas City to St. Louis, 1 I.C.C.2d 776 (1984), 4 I.C.C.2d 668 (1987), 5 I.C.C.2d 525 (1989), 8 I.C.C.2d 80 (1991)).
369. Loretto, 458 U.S. at 422.
370. See, e.g., David K. Cheng, Field and Wave Electromagnetics 175, 180-81 (1983); Peter S. Fox-Penner, Electric Power Transmission and Wheeling: A Technical Primer 5, 53 (1990). Kirchhoff's voltage law "states that around a closed path in an electric circuit the algebraic sum of the [electromagnetic forces] (voltage rises) is equal to the algebraic sum of the voltage drops across the resistances." Cheng, supra, at 180 (emphasis omitted). Kirchhoff s current law "states that the algebraic sum of all currents flowing out of a junction in an electric circuit is zero." Id. at 181 (emphasis omitted). The two laws respectively form the bases for loop analysis and node analysis in circuit theory. Id. at 180-81. On the pricing of transmission in the presence of parallel flows, see William W. Hogan, Contract Networks for Electric Power Transmission, 4 J. Reg. Econ. 211, 218-28 (1992).
371. See, e.g., David K. Cheng, Field and Wave Electromagnetics 175, 180-81 (1983); Peter S. Fox-Penner, Electric Power Transmission and Wheeling: A Technical Primer 5, 53 (1990). Kirchhoff's voltage law "states that around a closed path in an electric circuit the algebraic sum of the [electromagnetic forces] (voltage rises) is equal to the algebraic sum of the voltage drops across the resistances." Cheng, supra, at 180 (emphasis omitted). Kirchhoff s current law "states that the algebraic sum of all currents flowing out of a junction in an electric circuit is zero." Id. at 181 (emphasis omitted). The two laws respectively form the bases for loop analysis and node analysis in circuit theory. Id. at 180-81. On the pricing of transmission in the presence of parallel flows, see William W. Hogan, Contract Networks for Electric Power Transmission, 4 J. Reg. Econ. 211, 218-28 (1992).
372. See, e.g., David K. Cheng, Field and Wave Electromagnetics 175, 180-81 (1983); Peter S. Fox-Penner, Electric Power Transmission and Wheeling: A Technical Primer 5, 53 (1990). Kirchhoff's voltage law "states that around a closed path in an electric circuit the algebraic sum of the [electromagnetic forces] (voltage rises) is equal to the algebraic sum of the voltage drops across the resistances." Cheng, supra, at 180 (emphasis omitted). Kirchhoff s current law "states that the algebraic sum of all currents flowing out of a junction in an electric circuit is zero." Id. at 181 (emphasis omitted). The two laws respectively form the bases for loop analysis and node analysis in circuit theory. Id. at 180-81. On the pricing of transmission in the presence of parallel flows, see William W. Hogan, Contract Networks for Electric Power Transmission, 4 J. Reg. Econ. 211, 218-28 (1992).
373. Loretto, 458 U.S. at 433 n.9.
374. See Chang v. United States, 859 F.2d 893, 895 (Fed. Cir. 1988) ("There is no question that '[v]alid contracts are property, whether the obligor be a private individual . . . or the United States.'" (quoting Lynch v. United States, 292 U.S. 571, 579 (1934))).
375. See Covington & Lexington Turnpike Rd. Co. v. Sandford, 164 U.S. 578, 597 (1896) (A rate that is too low can "destroy the value of [the] property.").
376. Duquesne Light Co. v. Barasch, 488 U.S. 299, 308 (1989); Smyth v. Ames, 169 U.S. 466, 546 (1898). See generally Richard J. Pierce, Jr., Public Utility Regulatory Takings: Should the Judiciary Attempt to Police the Political Institutions?, 77 Geo. L.J. 2031 (1989).
377. FPC v. Hope Natural Gas Co., 320 U.S. 591, 605 (1944).
378. 320 U.S. 591 (1944).
379. 488 U.S. 299 (1989).
380. Several other utilities were involved in Duquesne. For simplicity, we refer only to Duquesne.
381. Duquesne, 488 U.S. at 302.
382. Id. at 303-04.
383. Id. at 307.
384. Id.
385. Id. at 307-08 (citing FPC v. Texaco Inc., 417 U.S. 380, 391-92 (1974); FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 585 (1942); Covington & Lexington Turnpike Rd. Co. v. Sandford, 164 U.S. 578, 597 (1896)).
386. 169 U.S. 466 (1898).
387. Id. at 546.
388. "[I]t is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unreasonable, judicial inquiry . . . is at an end. The fact that the method employed to reach that result may contain infirmities is not then important." Duquesne, 488 U.S. at 310 (quoting FPC v. Hope Natural Gas Co., 320 U.S. 591, 602 (1944)). The Duquesne Court liked Hope's rhetoric of "theory" and "impact" so much that it quoted the language twice. See id. at 314.
389. Id. at 312.
390. Id. at 311-12. "The Constitution protects the utility from the net effect of the rate order on its property. Inconsistencies in one aspect of the methodology have no constitutional effect on the utility's property if they are compensated by countervailing factors in some other aspect." Id. at 314.
391. See Vogelstein, supra note 34, at C1.
392. Duquesne, 488 U.S. at 312.
393. Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 413 (1922).
394. Duquesne, 488 U.S. at 312.
395. Id. at 315.
396. Id. at 317 (Scalia, J., concurring) (emphasis added).
397. Id. at 315.
398. Some discussion of these issues appears in A. Lawrence Kolbe, William B. Tye & Stewart C. Myers, Regulatory Risk: Economic Principles and Applications to Natural Gas Pipelines and Other Industries 9-46 (1993); A. Lawrence Kolbe & William B. Tye, The Duquesne Opinion: How Much "Hope" Is There for Investors in Regulated Firms?, 8 Yale J. on Reg. 113, 123-27 (1991) [hereinafter Kolbe & Tye, The Duquesne Opinion]; Stephen F. Williams, Fixing the Rate of Return After Duquesne, 8 Yale J. on Reg. 159, 159-63 (1991); see also Roger A. Morin, Regulatory Finance: Utilities' Cost of Capital 38-40 (1994).
399. Some discussion of these issues appears in A. Lawrence Kolbe, William B. Tye & Stewart C. Myers, Regulatory Risk: Economic Principles and Applications to Natural Gas Pipelines and Other Industries 9-46 (1993); A. Lawrence Kolbe & William B. Tye, The Duquesne Opinion: How Much "Hope" Is There for Investors in Regulated Firms?, 8 Yale J. on Reg. 113, 123-27 (1991) [hereinafter Kolbe & Tye, The Duquesne Opinion]; Stephen F. Williams, Fixing the Rate of Return After Duquesne, 8 Yale J. on Reg. 159, 159-63 (1991); see also Roger A. Morin, Regulatory Finance: Utilities' Cost of Capital 38-40 (1994).
400. Some discussion of these issues appears in A. Lawrence Kolbe, William B. Tye & Stewart C. Myers, Regulatory Risk: Economic Principles and Applications to Natural Gas Pipelines and Other Industries 9-46 (1993); A. Lawrence Kolbe & William B. Tye, The Duquesne Opinion: How Much "Hope" Is There for Investors in Regulated Firms?, 8 Yale J. on Reg. 113, 123-27 (1991) [hereinafter Kolbe & Tye, The Duquesne Opinion]; Stephen F. Williams, Fixing the Rate of Return After Duquesne, 8 Yale J. on Reg. 159, 159-63 (1991); see also Roger A. Morin, Regulatory Finance: Utilities' Cost of Capital 38-40 (1994).
401. Some discussion of these issues appears in A. Lawrence Kolbe, William B. Tye & Stewart C. Myers, Regulatory Risk: Economic Principles and Applications to Natural Gas Pipelines and Other Industries 9-46 (1993); A. Lawrence Kolbe & William B. Tye, The Duquesne Opinion: How Much "Hope" Is There for Investors in Regulated Firms?, 8 Yale J. on Reg. 113, 123-27 (1991) [hereinafter Kolbe & Tye, The Duquesne Opinion]; Stephen F. Williams, Fixing the Rate of Return After Duquesne, 8 Yale J. on Reg. 159, 159-63 (1991); see also Roger A. Morin, Regulatory Finance: Utilities' Cost of Capital 38-40 (1994).
402. Duquesne, 488 U.S. at 315.
403. On the contrasting incentives to achieve the economically efficient result under differing rules for the recovery of stranded costs, see Michael J. Doane & Michael Williams, Competitive Entry into Regulated Monopoly Service and the Resulting Problem of Stranded Costs, 2 Hume Papers on Pub. Pol'y, no. 3, at 32 (1995).
404. Re Competition for Local Exchange Service, 165 Pub. Util. Rep. 4th (PUR) 127 (Cal. Pub. Utils. Comm'n 1995).
405. Id. at 128. The FCC has also endorsed the use of bill-and-keep as a model of interconnection pricing. In re Interconnection Between Local Exchange Carriers and Commercial Mobile Radio Service Providers; Equal Access and Interconnection Obligations Pertaining to Commercial Mobile Radio Service Providers, Notice of Proposed Rulemaking, CC Dkt. Nos. 95-185, 94-54, 11 F.C.C.R. 5020 (1996).
406. Re Competition for Local Exchange Service, 165 Pub. Util. Rep. 4th (PUR) at 129.
407. 137 P. 1119 (Cal. 1913).
408. Id. at 1128.
409. Re Competition for Local Exchange Service, 165 Pub. Util. Rep. 4th (PUR) at 134.
410. Id. at 132-33.
411. Id.
412. Id. at 133 (citing the unreported case of Pacific Tel. & Tel. v. Wright-Dickerson Hotel Co. (D. Or. 1914); Annotation, Right and Duty of Telephone Co. to Make Physical Connection, 11 A.L.R. 1204, 1213 (1921) (citation to Pacific Tel. & Tel. Co. v. Eshleman, 137 P. 1119 (Cal. 1913), omitted)).
413. Id. at 133 (citation omitted).
414. Id. at 134.
415. Id.
416. Id.
417. Id.
418. Id.
419. Id.
420. Id. (emphasis in original) (citation omitted).
421. Pacific Tel. & Tel. Co. v. Eshleman, 137 P. 1119, 1127 (Cal. 1913).
422. Id. at 1127-28. Justice Henshaw quoted an eminent domain treatise as follows: "[O]ne company cannot be authorized to take the joint use of another's tracks, except by an exercise of the eminent domain power. All the cases practically concede this by holding that compensation must be made. That it is competent for the Legislature to authorize a railroad company to take the right to use the tracks of another railroad jointly, upon making compensation as required by the Constitution, is a proposition almost unanimously supported by the authorities." Id. at 1127 (quoting 2 John Lewis, A Treatise on the Law of Eminent Domain in the United States § 423 (3d ed. 1909)). Judge Henshaw next quoted a treatise on regulated industries as follows: "The principles discussed do not go so far as to give one common carrier the right to demand the use of the facilities of rival common carriers in order to compete against them. Thus it seems plain that one railroad cannot be required to make physical connection with its rival so that it may take its business away from it." Id. at 1127-28 (quoting 1 Bruce Wyman, The Special Law Governing Public Service Corporations § 698 (1911)). Finally, in relevant part, Justice Henshaw quoted a treatise on municipal franchises for the proposition that "'the Legislature cannot, without compensation to the first company, authorize the second company to take or use the track of the first, although with compensation this might be done under the power of eminent domain if in its judgment the public good required it.'" Id. at 1128 (quoting John Forrest Dillon, Commentaries on the Law of Municipal Corporations § 727 (4th ed. 1890); John Forrest Dillon, Commentaries on the Law of Municipal Corporations § 1280 (5th ed. 1911)).
423. Id.
424. Id. at 1137 (citing Attorney-General v. Old Colony R.R., 35 N.E. 252 (Mass. 1893)).
425. Id. at 1143 (Sloss, J., concurring).
426. Id. (citation omitted).
427. 114 S. Ct. 2309 (1994).
428. Id. at 2317 (citing Perry v. Sindermann, 408 U.S. 593 (1972); Pickering v. Board of Educ., 391 U.S. 563, 568 (1968)).
429. Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 438 n.17 (1982).
430. Id.
431. Id.
432. Cf. MacAvoy, supra note 13, at 200-10.
433. See Epstein, supra note 6, at 182 ("In principle, the ideal solution is to leave the individual owner in a position of indifference between the taking by the government and retention of the property.").
434. See, e.g., Olson v. United States, 292 U.S. 246, 255 (1934). The Court has also repeatedly stated: "The owner is to be put in the same position monetarily as he would have occupied if his property had not been taken." United States v. Reynolds, 397 U.S. 14, 16 (1970); accord United States v. New River Collieries Co., 262 U.S. 341, 343 (1923); Sea-board Air Line Ry. Co. v. United States, 261 U.S. 299, 304 (1923). That formulation of compensation should not be confused with reliance damages: If the property owner were restored to the status quo ante, he could voluntarily transfer his property to a willing buyer at its expectation value. Thus, the Court's formulation implicitly requires that restoration of the property owner to the status quo ante will compensate him for all the opportunity costs of losing his property to government confiscation.
435. English jurists have emphasized that the purpose of compensation is to "give[] to the owner compelled to sell . . . the right to be put, so far as money can do it, in the same position as if his land had not been taken from him." Horn v. Sunderland Corp., 1 All E.R. 480, 491 (C.A. 1941) (Scott, J.); accord Maidstone Borough Council v. Secretary of State for the Env't, 3 P.L.R. 66 (C.A. 1995); see also Nelungaloo Proprietary Ltd. v. Commonwealth, 75 C.L.R. 495, 571 (Austl. 1948) ("[T]he purpose of compensation . . . is to place in the hands of the owner expropriated the full money equivalent of the thing of which he has been deprived.").
436. Nelungaloo, 75 C.L.R. at 571 (Dixon, J., dissenting).
437. Ligare v. Chicago, Madison & N.R.R., 46 N.B. 803, 808 (Ill. 1897); accord Edgcomb Steel v. State, 131 A.2d 70 (N.H. 1957). In his dissent in Munn v. Illinois, Justice Field made a similar observation about rate regulation: "The amount [of compensation] fixed will operate as a partial destruction of the value of the property, if it falls below the amount which the owner would obtain by contract. . . ." Munn v. Illinois, 94 U.S. 113, 143 (1876) (Field, J., dissenting).
438. See 735 Ill. Comp. Stat. 5/7-121 (West 1992) (formerly Ill. Rev. Stat. ch. 110, para. 7-121).
439. Alchian, supra note 72, at 404.
440. Richard A. Brealey & Stewart C. Myers, Principles of Corporate Finance 98 (4th ed. 1991) (footnote omitted).
441. Robinson Bros. (Brewers) Ltd. v. Houghton & Chester-Le-Street Assessment Comm., 2 All E.R. 298 (CA. 1937), aff'd, 2 All E.R. 79 (H.L. 1938).
442. Emmons v. Power Utils. Co., 141 A. 65, 67 (N.H. 1927).
443. United States v. 564.4 Acres of Land, 441 U.S. 506, 511 (1979).
444. See, e.g., J. Fred Weston, Kwang S. Chung & Susan E. Hoag, Mergers, Restructuring and Corporate Control 138-44 (1990).
445. Advocates of the rule include Baumol & Sidak, Toward Competition in Local Telephony, supra note 39; Baumol & Sidak, supra note 17; Michael A. Crew & Paul R. Kleindorfer, Pricing in Postal Service Under Competitive Entry, in Commercialization of Postal and Delivery Services: National and International Perspectives 117, 122-27 (Michael A. Crew & Paul R. Kleindorfer eds., 1995); MacAvoy, supra note 13, at 209; William J. Baumol, Janusz A. Ordover & Robert D. Willig, Notes on the Efficient Component Pricing Rule, Paper Presented at The Transition Towards Competition in Network Industries, First Annual Conference, PURC-IDEI-Cirano, Montreal (Oct. 13-14, 1995); Alfred E. Kahn & William Taylor, The Pricing of Inputs Sold to Competitors: A Comment, 11 Yale J. on Reg. 225 (1994).
446. Advocates of the rule include Baumol & Sidak, Toward Competition in Local Telephony, supra note 39; Baumol & Sidak, supra note 17; Michael A. Crew & Paul R. Kleindorfer, Pricing in Postal Service Under Competitive Entry, in Commercialization of Postal and Delivery Services: National and International Perspectives 117, 122-27 (Michael A. Crew & Paul R. Kleindorfer eds., 1995); MacAvoy, supra note 13, at 209; William J. Baumol, Janusz A. Ordover & Robert D. Willig, Notes on the Efficient Component Pricing Rule, Paper Presented at The Transition Towards Competition in Network Industries, First Annual Conference, PURC-IDEI-Cirano, Montreal (Oct. 13-14, 1995); Alfred E. Kahn & William Taylor, The Pricing of Inputs Sold to Competitors: A Comment, 11 Yale J. on Reg. 225 (1994).
447. Advocates of the rule include Baumol & Sidak, Toward Competition in Local Telephony, supra note 39; Baumol & Sidak, supra note 17; Michael A. Crew & Paul R. Kleindorfer, Pricing in Postal Service Under Competitive Entry, in Commercialization of Postal and Delivery Services: National and International Perspectives 117, 122-27 (Michael A. Crew & Paul R. Kleindorfer eds., 1995); MacAvoy, supra note 13, at 209; William J. Baumol, Janusz A. Ordover & Robert D. Willig, Notes on the Efficient Component Pricing Rule, Paper Presented at The Transition Towards Competition in Network Industries, First Annual Conference, PURC-IDEI-Cirano, Montreal (Oct. 13-14, 1995); Alfred E. Kahn & William Taylor, The Pricing of Inputs Sold to Competitors: A Comment, 11 Yale J. on Reg. 225 (1994).
448. Advocates of the rule include Baumol & Sidak, Toward Competition in Local Telephony, supra note 39; Baumol & Sidak, supra note 17; Michael A. Crew & Paul R. Kleindorfer, Pricing in Postal Service Under Competitive Entry, in Commercialization of Postal and Delivery Services: National and International Perspectives 117, 122-27 (Michael A. Crew & Paul R. Kleindorfer eds., 1995); MacAvoy, supra note 13, at 209; William J. Baumol, Janusz A. Ordover & Robert D. Willig, Notes on the Efficient Component Pricing Rule, Paper Presented at The Transition Towards Competition in Network Industries, First Annual Conference, PURC-IDEI-Cirano, Montreal (Oct. 13-14, 1995); Alfred E. Kahn & William Taylor, The Pricing of Inputs Sold to Competitors: A Comment, 11 Yale J. on Reg. 225 (1994).
449. Advocates of the rule include Baumol & Sidak, Toward Competition in Local Telephony, supra note 39; Baumol & Sidak, supra note 17; Michael A. Crew & Paul R. Kleindorfer, Pricing in Postal Service Under Competitive Entry, in Commercialization of Postal and Delivery Services: National and International Perspectives 117, 122-27 (Michael A. Crew & Paul R. Kleindorfer eds., 1995); MacAvoy, supra note 13, at 209; William J. Baumol, Janusz A. Ordover & Robert D. Willig, Notes on the Efficient Component Pricing Rule, Paper Presented at The Transition Towards Competition in Network Industries, First Annual Conference, PURC-IDEI-Cirano, Montreal (Oct. 13-14, 1995); Alfred E. Kahn & William Taylor, The Pricing of Inputs Sold to Competitors: A Comment, 11 Yale J. on Reg. 225 (1994).
450. Advocates of the rule include Baumol & Sidak, Toward Competition in Local Telephony, supra note 39; Baumol & Sidak, supra note 17; Michael A.
451. This is the case when service is provided using only the incumbent's facilities. When competing facilities are available, the opportunity cost of the incumbent is the difference between the market price of facilities and the incumbent's incremental cost, b. The efficient access charge then is simply equal to the market price of facilities-based service.
452. 1), where D(P) is market demand. Assuming that market demand crosses average cost from above, the average-cost price is lowered by lowering the average-cost function. This establishes that the inequality holds if and only if g < c.
453. 2 is the entrant's output.
454. For other demonstrations of the ECPR's efficiency, see Baumol & Sidak, Toward Competition in Local Telephony, supra note 39, at 105-07; Baumol & Sidak, The Pricing of Inputs Sold to Competitors, supra note 39, at 187-89; William J. Baumol & J. Gregory Sidak, Pricing of Services Provided to Competitors by the Regulated Firm, 3 Hume Papers on Pub. Pol'y, Autumn 1995, at 15, 16-25.
455. For other demonstrations of the ECPR's efficiency, see Baumol & Sidak, Toward Competition in Local Telephony, supra note 39, at 105-07; Baumol & Sidak, The Pricing of Inputs Sold to Competitors, supra note 39, at 187-89; William J. Baumol & J. Gregory Sidak, Pricing of Services Provided to Competitors by the Regulated Firm, 3 Hume Papers on Pub. Pol'y, Autumn 1995, at 15, 16-25.
456. For other demonstrations of the ECPR's efficiency, see Baumol & Sidak, Toward Competition in Local Telephony, supra note 39, at 105-07; Baumol & Sidak, The Pricing of Inputs Sold to Competitors, supra note 39, at 187-89; William J. Baumol & J. Gregory Sidak, Pricing of Services Provided to Competitors by the Regulated Firm, 3 Hume Papers on Pub. Pol'y, Autumn 1995, at 15, 16-25.
457. See, e.g., Jeremy Edwards, John Kay & Colin Mayer, The Economic Analysis of Accounting Profitability 2-3 (1987).
458. Id. at 41-42.
459. See, e.g., 1 Kahn, supra note 176, at 26.
460. For a more detailed and technical exposition of how rival access technologies constrain the ability of the ECPR to be fully compensatory, see J. Gregory Sidak & Daniel F, Spulber, Deregulatory Takings and the Regulatory Contract: The Competitive Transformation of Network Industries in the United States (forthcoming 1997).
461. Duquesne Light Co. v. Barasch, 488 U.S. 299, 314 (1989) (quoting FPC v. Hope Natural Gas, 320 U.S. 591, 602 (1944)).
462. Id. at 312.
463. Irwin M. Stelzer, What Happens When the Rules Are Changed and the Plug Is Pulled on Electric Utilities?, Am. Enterprise, Nov./Dec. 1994, at 76, 81 [hereinafter Stelzer, When the Plug Is Pulled]; see also Irwin M. Stelzer, A New Era for Public Utilities, Pub. Interest, Fall 1994, at 81, 83-84.
464. Irwin M. Stelzer, What Happens When the Rules Are Changed and the Plug Is Pulled on Electric Utilities?, Am. Enterprise, Nov./Dec. 1994, at 76, 81 [hereinafter Stelzer, When the Plug Is Pulled]; see also Irwin M. Stelzer, A New Era for Public Utilities, Pub. Interest, Fall 1994, at 81, 83-84.
465. Stelzer, When the Plug Is Pulled, supra note 386, at 81.
466. Id. More generalized versions of this argument against compensation on grounds of rational expectations and moral hazard appear in Lawrence E. Blume & Daniel L. Rubinfeld, Compensation for Takings: An Economic Analysis, 72 Cal. L. Rev. 569, 622-23 (1984); Louis Kaplow, An Economic Analysis of Legal Transitions, 99 Harv. L. Rev. 509, 536-50 (1986); Susan Rose-Ackerman, Against Ad Hocery: A Comment on Michelman, 88 Colum. L. Rev. 1697, 1702-11 (1988). For a critical assessment of that theoretical literature, see Fischel, supra note 2, at 184-88.
467. Id. More generalized versions of this argument against compensation on grounds of rational expectations and moral hazard appear in Lawrence E. Blume & Daniel L. Rubinfeld, Compensation for Takings: An Economic Analysis, 72 Cal. L. Rev. 569, 622-23 (1984); Louis Kaplow, An Economic Analysis of Legal Transitions, 99 Harv. L. Rev. 509, 536-50 (1986); Susan Rose-Ackerman, Against Ad Hocery: A Comment on Michelman, 88 Colum. L. Rev. 1697, 1702-11 (1988). For a critical assessment of that theoretical literature, see Fischel, supra note 2, at 184-88.
468. Id. More generalized versions of this argument against compensation on grounds of rational expectations and moral hazard appear in Lawrence E. Blume & Daniel L. Rubinfeld, Compensation for Takings: An Economic Analysis, 72 Cal. L. Rev. 569, 622-23 (1984); Louis Kaplow, An Economic Analysis of Legal Transitions, 99 Harv. L. Rev. 509, 536-50 (1986); Susan Rose-Ackerman, Against Ad Hocery: A Comment on Michelman, 88 Colum. L. Rev. 1697, 1702-11 (1988). For a critical assessment of that theoretical literature, see Fischel, supra note 2, at 184-88.
469. Id. More generalized versions of this argument against compensation on grounds of rational expectations and moral hazard appear in Lawrence E. Blume & Daniel L. Rubinfeld, Compensation for Takings: An Economic Analysis, 72 Cal. L. Rev. 569, 622-23 (1984); Louis Kaplow, An Economic Analysis of Legal Transitions, 99 Harv. L. Rev. 509, 536-50 (1986); Susan Rose-Ackerman, Against Ad Hocery: A Comment on Michelman, 88 Colum. L. Rev. 1697, 1702-11 (1988). For a critical assessment of that theoretical literature, see Fischel, supra note 2, at 184-88.
470. Irwin M. Stelzer, Restructuring the Electric Utility Industry: Further Tentative Thoughts, Electrical J., Oct. 1994, at 36, 38.
471. Id.
472. See John J. Binder, Measuring the Effects of Regulation with Stock Price Data, 16 RAND J. Econ. 167, 167-68 (1985); G. William Schwert, Using Financial Data to Measure Effects of Regulation, 24 J.L. & Econ. 121, 122-24, 149-50 (1981).
473. See John J. Binder, Measuring the Effects of Regulation with Stock Price Data, 16 RAND J. Econ. 167, 167-68 (1985); G. William Schwert, Using Financial Data to Measure Effects of Regulation, 24 J.L. & Econ. 121, 122-24, 149-50 (1981).
474. See A. Lawrence Kolbe & William B. Tye, It Ain't in There: The Cost of Capital Does Not Compensate for Stranded-Cost Risk, Pub. Util. Fort., May 15, 1995, at 26.
475. For additional discussion of this point, see Stewart C. Myers, The Application of Finance Theory to Public Utility Rate Cases, 3 Bell J. Econ. 58, 65-72 (1972); Richard H. Pettway, On the Use of β in Regulatory Proceedings: An Empirical Examination, 9 Bell J. Econ. 239, 239-40 (1978); Daniel F. Spulber & Yossef Spiegel, The Capital Structure of a Regulated Firm, 25 RAND J. Econ. 424, 426-27 (1994).
476. For additional discussion of this point, see Stewart C. Myers, The Application of Finance Theory to Public Utility Rate Cases, 3 Bell J. Econ. 58, 65-72 (1972); Richard H. Pettway, On the Use of β in Regulatory Proceedings: An Empirical Examination, 9 Bell J. Econ. 239, 239-40 (1978); Daniel F. Spulber & Yossef Spiegel, The Capital Structure of a Regulated Firm, 25 RAND J. Econ. 424, 426-27 (1994).
477. For additional discussion of this point, see Stewart C. Myers, The Application of Finance Theory to Public Utility Rate Cases, 3 Bell J. Econ. 58, 65-72 (1972); Richard H. Pettway, On the Use of β in Regulatory Proceedings: An Empirical Examination, 9 Bell J. Econ. 239, 239-40 (1978); Daniel F. Spulber & Yossef Spiegel, The Capital Structure of a Regulated Firm, 25 RAND J. Econ. 424, 426-27 (1994).
478. Kolbe & Tye, The Duquesne Opinion, supra note 331, at 145-46.
479. Williams, supra note 331, at 162.
480. Id. at 163.
481. See supra text accompanying notes 386-88.
482. 485 U.S. 1 (1988).
483. Id. at 4-6.
484. Id. at 9-10.
485. Id. at 8-11. See generally Gregory M. Stein, Regulatory Takings and Ripeness in the Federal Courts, 48 Vand. L. Rev. 1 (1995).
486. Benjamin A. Holden, California's Struggle Shows How Hard It Is to Deregulate Utilities, Wall St. J., Nov. 28, 1995, at A1.
487. See Baumol & Sidak, supra note 17, at 144-47.
488. To our knowledge, this person has not publicly expressed his views in print. For that reason, we do not identify him.
489. The argument is similar, for example, to the argument that the best way to restrain the growth of the federal government is for it to repudiate some amount of its debt: A government that acted opportunistically with respect to its creditors would thereafter face a higher cost of borrowing, which would limit its ability to finance expenditures with debt.
490. See, e.g., J. Gregory Sidak & Daniel F. Spulber, Protecting Competition from the Postal Monopoly 88 (1996).
491. The Governor's Plan for Lilco, N.Y. Times, Oct. 20, 1994, at A26.
492. 243 U.S. 188 (1917).
493. Id. at 198.
494. See, e.g., Bowen v. Gilliard, 483 U.S. 587, 604, 607 (1987); United States R.R. Retirement Bd. v. Fritz, 449 U.S. 166, 174 (1980); Lynch v. United States, 292 U.S. 571, 576-77 (1934); United States v. Teller, 107 U.S. 64, 68 (1882); Hoffman v. City of Warwick, 909 F.2d 608, 616-17 (1st Cir. 1990).
495. Bishop v. Wood, 426 U.S. 341, 344 (1976) (tenured public employment); Mathews v. Eldridge, 424 U.S. 319, 332 (1976) (social security disability benefits); Goss v. Lopez, 419 U.S. 565, 574 (1975) (public education); Fusari v. Steinberg, 419 U.S. 379, 387-89 (1975) (unemployment benefits); Wheeler v. Montgomery, 397 U.S. 280, 282 (1970) (old-age benefits); Goldberg v. Kelly, 397 U.S. 254, 262 (1970) (welfare payments).
496. 408 U.S. 564 (1972).
497. Id. at 577.
498. 260 U.S. 393 (1922).
499. Id. at 416.
500. Id.